Probably a lot of reasons but I think they clung to their scheme of letting drivers set their prices which I believe they both thought might be preferred as well as "more legal". But it was generally a worse experience.
I hope hindsight doesn't forget that it was indeed a gamble. Homejoy made a similar bet in the housecleaning industry, but couldn't find a way to pay the illegal workers that make up a good portion of the industry (there were other issues Homejoy mentioned, but this one stood out to me - I could be wrong though).
Has the IRS ruled yet on whether Uber and Lyft are going to owe hundreds of millions in back taxes and penalties due to misclassifying drivers as independent contractors? No? Still plenty of time to be shut down.
Point being...under existing regulations, Uber/Lyft drivers are probably W-2s. But Uber/Lyft are lobbying hard for an alternative, and will probably succeed in changing minds about it faster than the government can move to crack down.
I'd imagine in some markets Uber would actually benefit from W-2 workforce - this would allow them to mandate hours and location to avoid the dreaded (by consumers) surge pricing.
I was using their app while I was out on a saturday night and noticed some drivers setting insanely high prices like $999-- and some prices appeared to change at the last minute, so my intoxicated finger might have requested a ridiculously expensive ride.
I couldn't tell if that was a bug or if some drivers were actually trying to screw people over; either way, that was the last time I ever used it. I emailed them about it because I figured they should fix the bug or at least implement some kind validation so that rides would have a reasonable maximum price, but obviously nothing happened.