California legislators passed a landmark bill on Tuesday that threatens to reshape rideshare companies’ business models. Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) have been actively combating this legislation that would force the companies to classify their drivers as employees, instead of independent contractors Known as Assembly Bill 5 (AB5), the legislation passed in both the State Senate and the State Assembly. The bill now heads to the desk of California Governor Gavin Newsom, who’s expected to sign it into law.
Governor Newsom recently expressed his support for the bill, which would go into effect Jan. 1 of next year, saying it would provide critical labor protections for workers. Rideshare companies spent much of the year pushing lawmakers to alter the bill or exempt them from it, but their efforts fell short to the opposition from labor unions and strong Democratic support for the bill.
Implications for Uber Stock and Lyft Stock
Uber and Lyft argued that the bill would increase their costs and create logistical challenges that would be bad for them and their employees. Lyft spokesperson Adrian Durbin commented, “Today, our state’s political leadership missed an opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits.”
Uber said in a blog post that the bill would lead to downsizing, as it would be not be able to retain all of the drivers they have hired if it becomes law. Uber also said that it was looking to propose an idea that would preserve its flexibility and reliability while improving the quality and security of its independent workers. If AB5 becomes law, Uber would most likely pass the costs onto consumers, resulting in fare hikes. The bill is also likely going to bring the “gig” economy issue to national attention, which could result in additional states in the country passing similar laws.
Food delivery companies would also be impacted by the potential legislation, since they also fall under the gig economy umbrella. Some companies would be affected more than others; DoorDash and Postmates have more presence in California than Grubhub (NYSE: GRUB), for example. Deustche Bank estimates that California accounts for 20% of Lyft’s bookings and Cowen analysts believe that California will comprise roughly 6% of Uber’s bookings in 2019.
The Bottom Line on Uber Stock and Lyft Stock
This bill does not bode well for the gig economy, and will likely motivate other states to pass similar laws. Rideshare companies will have to pass on the extra costs brought on by AB5 to consumers, which can hurt their top-line, weighing on Uber stock and Lyft stock. Uber and Lyft are already losing billions competing with each other for market share, and they now will likely have to contend with unfavorable legislation. Both companies have not been able to gain momentum since their IPO; Uber stock is down 17.7% since its May public offering and Lyft stock has tumbled 39.5%.
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