The gig could be up for ride hailers
A California bill stands to bring significant increases in expenses
A fight in California over the status of gig workers such as Uber drivers raises long-term questions on the treatment of independent workers. Regulation could have serious impacts for some companies more than others, though.
California senators will vote in the coming days on a bill that could spark broad change for independent contractors across industries. If passed, the bill could force gig-economy platforms including Uber and DoorDash to reclassify independent contractors as employees in the state. While many companies are working tirelessly on proposals that would keep contractors off the books, eventual change at the state-level looks increasingly likely.
At the national level, the definition of gig workers has been hotly contested. Earlier this year, the Trump administration’s Labor Department classified workers finding clients through online platforms as contractors who can pursue external opportunities “at their leisure.” This is a departure from the department’s stance under President Obama when it said classification should be based on whether the workers are “integral” to the business.
During its initial-public-offering process, Lyft said 90% of its drivers were employed elsewhere, seeking employment, full-time students or retired. Lyft now says 89% of its California drivers are driving fewer than 20 hours a week. Others argue that these figures may be off: A 2018 survey by Harry Campbell of The Rideshare Guy blog found 35% of drivers say they drive full-time.
It seems likely that both houses of California’s Democratdominated legislature will pass the bill before lawmakers adjourn on Sept. 13. California Governor Gavin Newsom publicly supported the bill in an oped in the Sacramento Bee, saying that what he called the misclassification of workers is driven by companies eager to save on labor costs.
Ride-hailers say their drivers don’t want to be full-time employees because such a status would likely prompt assigned shifts and mandated hours, diluting the flexibility they enjoy. Food-delivery companies such as DoorDash and Postmates agree.
A Postmates spokesperson said that since Labor Day, 5,700 on-demand gig workers have sent messages to lawmakers calling to preserve their flexibility.
Uber, Lyft, and DoorDash have collectively contributed $90 million toward a ballot initiative that would exempt them from the proposed law. Through the initiative, the companies would offer wage concessions, benefits and collective-bargaining power for drivers but skirt “employee” status. There may be a significant financial incentive for them to do so: Morgan Stanley estimates the employer-status law could increase California driver costs by 35%.
Such increases could affect some gig players more than others. Deutsche Bank estimates California accounts for roughly 20% of Lyft’s bookings, while Cowen reckons California will comprise roughly 6% of core platform gross bookings for Uber in 2020. A broader reclassification across the U.S. also would impact Lyft more than Uber given it is mostly domestic.
Similarly, Cowen sees some food-delivery players impacted more than competitors. DoorDash and Postmates, for example, are more exposed in California than Grubhub, which delivers just 35% of its own orders overall, according to Cowen.
Most analysts expect gig platforms to pass on increased costs to consumers, as they have in New York City following an increase in minimum wages for drivers who work for ride-hailing apps. Analysts say ride growth has slowed due to higher fees, but not as much as expected. While consumers in New York City may be able to tolerate higher costs, however, that may not be the case in lessaffluent areas.
If passed, the California bill would go into effect in January 2020. Ride hailers say they are committed to reaching a deal with lawmakers, lobbying for a “gig worker” exemption to be placed on the November 2020 ballot, but that may not come easily. Uber has been working for years to appeal in the courts a 2016 ruling in the U.K. that held Uber drivers couldn’t be classified as self-employed. A larger risk is that a California reclassification could be adopted in other states. California is a “petri dish for blue states,” say analysts at Cowen, suggesting the likes of New York, New Jersey, Washington and Illinois could follow with similar legislation.
Uber and Lyft in particular are already losing billions competing against one-another for market share. Now they have to contend with state legislators, too. At some point, that could become a losing proposition for investors.