Shares in Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) continued their recovery early Sept. 13, despite passage of a California law classifying its drivers as employees, not contractors. Uber’s Chief Legal Officer Tony West shrugged off the news, saying drivers aren’t even “core” to Uber’s business.
Uber and Lyft have been lobbying heavily against the bill, called Assembly Bill 5, since it was introduced. They have even promised a referendum campaign against it, putting a repeal on the 2020 ballot.
Uber and Lyft aren’t making money even as they deny drivers the usual benefits of employment. Losses have increased as the two companies have scaled. I have written that Uber is barreling toward worthlessness.
The new bill, if signed into law by California Governor Gavin Newsom, may just hasten the inevitable.
The Bill’s Threat to Uber Stock
The business model of Uber and Lyft has always been based on flexibility. But the requirements for driving — a license and simple background check — don’t guarantee safety. Since the drivers are contractors, the companies deny responsibility for incidents, which has led to lawsuits.
AB5 bill codifies an “ABC Test” for determining whether workers are employees or contractors. Contractors would have to be free of the employer’s control and direction. They would have to be working outside the normal course of the company’s business. The work would also have to be outside the worker’s normal occupation.
West said in his press conference Uber can show its drivers meet that test and thus aren’t employees. Then how can Uber guarantee rider safety?
This has always been the problem with gig-economy jobs. There’s no worker protection, so drivers don’t get Social Security, health insurance, paid sick days, workers’ compensation or overtime. There’s also no consumer protection. Miriam Pawel of The New York Times says AB5 calls that arrangement feudalism.
Limited Jurisdiction
AB5 only applies to California.
The National Labor Relations Board has ruled that, as a matter of federal law, Uber and Lyft drivers are contractors. A judge has agreed, although drivers are appealing. A new class action suit, based on AB5, was filed in federal court Sept. 12.
With an unemployment rate of 3.7%, and even many fast food jobs paying over $15 per hour, it’s surprising that Uber and Lyft can get enough qualified drivers to meet demand.
Uber and Lyft get around consumer protection by looking the other way. They fight against stronger checks before courts and regulators and take their lumps when they lose.
This Is a Global Story
Uber’s efforts to expand globally have run into stiff resistance in Europe. The company sold its business in Asia but is gaining some traction in Africa.
The best-performing units of Uber appear to be Uber Eats (its food delivery service) and Uber Freight (which links trucks with freight loads). Both were specifically excluded from a recent Uber layoff, where 435 people, 8% of the workforce, went out the door.
The Bottom Line on Uber and Lyft Stock
Uber next reports earnings Nov. 7. Analysts are expecting a loss of about $1.4 billion on revenue of $3.7 billion. Lyft reports Nov. 6 and is expected to report a loss of about $450 million, $1.60 per share.
The original vision for Uber may just not work. But if Uber Freight can arbitrage trucking rates, and Uber Eats gains traction, the company could use that success to find a business model that does work.
It needs to, because investors are rapidly losing patience. Even with recent gains Uber stock remains 18% below its initial trade in May, and Lyft is now 40% below its initial trade in April. The meter is running on both companies, and time is running out.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
