The ride-hailing app Uber has said it could shut down services in its home state of California by the end of the week after a court gave it and the rival company Lyft an ultimatum to reclassify their drivers as employees.

Both Uber and Lyft have claimed it is impossible for them to change their business models at short notice after a California court set a deadline of the end of Thursday for them to upgrade the status of drivers currently deemed independent contractors.

Uber said on Tuesday night it would suspend its services in the US state from Friday if it did not win an appeal against the ruling, or secure a stay postponing the deadline.

The standoff is being closely watched around the world as the rise of the gig economy forces governments to examine outdated labour laws. In the UK Uber is facing a similar case at the supreme court, while the British food delivery company Deliveroo, a rival to Uber’s Uber Eats arm, has also faced legal battles over the status of workers.

The California ruling is also financially significant for Uber and Lyft because the state, where both were founded, is one of the world’s largest markets for taxi apps.

Judge Ethan Schulman of the San Francisco superior court last week ruled that Uber and Lyft must comply with a law that came into force on 1 January that holds that their workers are employees. He delayed enforcing his order by 10 days to allow time for an appeal.

Uber and other gig economy companies around the world have consistently denied that their drivers are employees, a classification that typically confers benefits such as sick pay and holiday pay in many jurisdictions.

Funding these worker benefits would represent a large expense for gig economy companies, which regularly argue that their drivers are independent because they can choose their own hours. Opponents of that position say that drivers are tightly controlled, crucially lacking the ability to set their own prices.

Uber and other gig economy companies are backing a new proposed law in California, labelled Proposition 22, which would classify workers as independent contractors.

In a blog post on Tuesday, Uber said: “We remain committed to helping drivers get access to new benefits and protections without compromising the flexibility they have today via Proposition 22, which is on the ballot this November.”

An Uber spokesman last week said politicians were “trying to shut down an entire industry during an economic depression”.

Mike Bonin, a Democrat member of Los Angeles city council, described Uber’s threat to suspend taxi services in California as “cruel and petulant”.

“Faced with a mandate to treat their workers fairly, they opted instead to leave them unemployed – in the middle of a pandemic and a recession,” he said.