Company / Analytics

Analytics, 14 August 2020

California ruling: crucial for Uber and Lyft

Uber and Lyft are under increasing pressure to fundamentally alter their business models in California, the state where both companies were founded and ultimately prospered. At issue is the classification of ride-hailing drivers as independent contractors. Uber and Lyft say drivers prefer the flexibility of working as freelancers, while labor unions and elected officials contend this deprives them of traditional benefits like health insurance and workers’ compensation.

Early this week, a California judge ruled that Uber and Lyft must classify their drivers as employees in a stunning preliminary injunction issued Monday afternoon. The injunction stays for 10 days, allowing Uber and Lyft to appeal the decision. Uber said it planned to file an immediate emergency appeal to block the ruling from going into effect.

Uber and Lyft have been in a major legal battle since California Assembly Bill 5 (AB5) went into effect at the beginning of this year. Uber and Lyft employees as with most gig-economy workers are often classified as contractors. As contractors, Uber and Lyft drivers don’t need to be paid a minimum wage, granted sick leave, workers compensation insurance, unemployment insurance, or other benefits employees are entitled to. The flurry of lawsuits and court rulings in California comes ahead of the November election when Californian voters will decide on an Uber-and-Lyft-backed ballot measure that would override AB5 by classifying ride-hail drivers and other gig economy workers as independent contractors.

How the ruling could impact Uber and Lyft?

If drivers were classified as employees, Uber and Lyft would be responsible for paying them minimum wage, overtime compensation, paid rest periods, and reimbursements for the cost of driving for the companies, including personal vehicle mileage. At the moment drivers receive none of these benefits as they work as independent contractors.

Uber and Lyft maintain the ruling conflicts with the desires of the majority of drivers and will result in fewer jobs during a global pandemic that is putting a strain on workers’ finances.

Uber CEO Dara Khosrowshahi, said that if Uber doesn’t prevail, the company will “shut down” until at least November — when Californian’s go to the ballot to decide on the matter – when he hopes Uber can continue with its contractor model.

However, it’s worth noting that Uber has no plans to cease California operations of Uber Eats, which has grown bigger than its ride-hailing business. Hence, Uber’s decision to shut down in California only applies to a section of its business which isn’t doing well at the moment.

In its second-quarter 2020 earnings report, Uber’s ride-hail business fell by 73% year-over-year, while UberEats grew by a whopping 113% in that same period. “UberEats was more than double the size of Uber’s rides business in the quarter,” Yahoo Finance reported Monday of the disparity between the units.

However, delivery drivers for UberEats and Postmates, the company that Uber acquired in a $2.65 billion deal last month, are also independent contractors that state and local officials say should be reclassified as employees under AB 5, but these drivers aren’t the subject of the present legal suit.

Still, the New York magazine noted that UberEats is still losing money hand over fist. “Cumulative payments to Drivers for Delivery deliveries historically have exceeded the cumulative delivery fees paid by consumers,” Uber said in its earnings report, another way that paying drivers to deliver food costs more than the company can make on every order.

As such, it’s significantly more expensive for Uber, Lyft and most other delivery businesses to pay a worker as an employee than as a contractor. DoorDash CEO Tony Xu has publicly said that a law requiring his company to reclassify delivery drivers “would have disastrous results” for his company, and per the Financial Times, “could mean the end of DoorDash, which is already, according to reports, losing $400m a year.”

Moreover, neither Uber nor Lyft have lived up to their 2019 IPO valuations: Uber has declined 18.3% since then and Lyft has fallen 49.1%.

In their 2019 IPO filings, both companies warned of legislative and legal battles regarding their business models and practices. As one analyst notes “if you know the history of Uber growing worldwide by breaking the law on a massive scale, you should know that it cannot escape recriminations for those actions forever”.

The California ruling will likely influence legal suits in other states. For example, in September 2019 when the Californian California Assembly Bill 5 (AB5) required drivers to be classified as workers, a coalition of labor groups pushed similar legislation in New York, Washington State, and Oregon but failed to advance. New York City also passed a minimum wage for ride-hailing drivers last year but did not try to classify them as employees.

How the stock moved?

Lyft shares fell 1.7% to USD 30 in premarket trading Thursday after the company reported a 61% drop in revenue during the second quarter amid prolonged shutdowns from the coronavirus pandemic. Lyft said active riders plunged 60% year over year. The stock was trading at USD 28,10 at the time of writing (Friday 14 Aug, 09:52 GMT-4).

On the other hand, Uber was trading at USD 29,96 (1,64%) at the time of writing (Friday 14 Aug, 09:51 GMT-4).

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