(Reuters) — A U.S. judge on Thursday said it was “very difficult” to decide whether drivers for smartphone-enabled car service Lyft are employees or independent contractors, but that California law appears to favor the drivers.

Lyft and larger rival Uber face separate lawsuits seeking class action status in San Francisco federal court, brought on behalf of drivers who contend they are employees and entitled to reimbursement for expenses including gas and vehicle maintenance. The drivers currently pay those costs themselves.

A ruling against either company could significantly raise their costs beyond the lawsuits' scope and force them to pay social security, workers' compensation, and unemployment insurance. That could affect the valuations for other startups that rely on large networks of individuals to provide rides, clean houses and the like.

At a hearing on the Lyft lawsuit on Thursday, U.S. District Judge Vincent Chhabria said he was “scratching my head” because traditional employment categories are “woefully outdated” when applied to companies like Lyft.

However, Judge Chhabria said California legal precedents “point pretty strongly in the direction” that “people who do the kinds of things that Lyft drivers do here are employees.”

Judge Chhabria did not rule from the bench. A hearing on the same issue involving Uber is set to take place on Friday before a different judge.

Uber has raised more than $4 billion from prominent venture capital firms such as Benchmark and Google Ventures, valuing the company at $40 billion and making it the most valuable U.S. startup. Lyft has raised $331 million from Andreessen Horowitz, Founders Fund and other investors.

The drivers have not yet specified how much money they are seeking in damages.

Drivers argue they should be considered employees because Uber and Lyft can hire and fire them and require them to accept a certain percentage of rides, and to pass background checks.

“They're there to further Lyft's mission,” said Matthew Carlson, an attorney for the drivers.

Uber and Lyft counter that drivers control their own schedules, are not assigned a territory, and are not supplied with any equipment apart from an iPhone and a sign.

“Lyft's business is to maintain an on-line platform, making it possible for riders and drivers to freely arrange transportation by automobile with other members of the community,” the company wrote in a court filing.