Shares of Lyft (NASDAQ:LYFT) tanked 17.1% in October, according to data from S&P Global Market Intelligence. That move sent the ride-hailing stock from $28 per share to $23 during the month.

For context, Lyft shares are down 47% for the year through October, primarily due to the COVID-19 impact on its business.

What happened

While Lyft didn't report any news during October that would explain the stock's 17% sell-off, the market was heavily focused on the Proposition 22 ballot initiative in California. Last year, California passed a bill called AB-5, which required companies like Lyft and Uber to reclassify all its contractors -- better known as drivers -- as employees and provide them with expanded benefits.

This law was set to increase Lyft's costs in California, which would probably lead to higher prices to the consumer and therefore lower demand for rides. It would also have reduced driver flexibility, the company had argued. 

A young woman with her hand in the air hailing down a ride.

Image source: Getty Images.

So what

Both Lyft and Uber had even threatened to stop operating in California if they were required to comply with AB-5. That would have significantly harmed all the company's drivers, who rely on ride hailing for either their primary or supplemental income.

Prop 22 was a ballot initiative that, if passed, would provide certain exceptions to this law, including ride sharing and other gig-oriented businesses. If Prop 22 had failed, it not only would have harmed Lyft's business, but also the political sentiment could have spread to other states. That would have caused investors to have serious concerns about Lyft's business.

Now what

We didn't know it during October, but Prop 22 passed in California in early November. That means Lyft is exempt from California's AB-5 law and doesn't have to reclassify its independent-contractor drivers as employees. The business model and the company's relationships with drivers will remain intact. 

As a result, Lyft's stock price has soared 65% to $38 as of this writing in November. Investors should consider this labor-law issue to be put to rest and refocus on how the economic recovery will impact Lyft's business. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.