Per-driver costs for Uber Technologies Inc. and Lyft Inc. in California could jump 30% starting in 2020 after the state passed a new law that may cause the ride-hailing companies to label workers as regular employees, according to industry experts.
The law, which awaits California Gov. Gavin Newsom's signature, would go into effect in January. It will require gig economy companies to classify their workers as employees instead of independent contractors if the workers meet certain criteria. Experts say this would increase costs for such companies as Uber and Lyft and could serve as a template for other states to pass similar rules. But the companies, along with food-delivery service DoorDash, are preparing to fight the law with a ballot measure in November 2020 that would label drivers as nonemployees and establish new pay standards and benefits. Uber is also arguing that the new law not be applicable to its drivers because of the company's business model.
Wedbush analyst Daniel Ives said the law has the potential to increase annual costs for Uber by $400 million to $500 million, and by $100 million for Lyft. The two companies have not disclosed how much of their business comes from the state, but Uber has more than 200,000 California drivers and Lyft has approximately 300,000.
After going public earlier this year, both companies posted major quarterly losses as they struggle to become profitable.
Ives said in a Sept. 11 research note that even though the bill is a "clear financial negative," the ride-hailing companies can offset the impact by reducing the hiring and flexibility of its California workforce.
"On the expense side for Uber/Lyft, this would lead to fewer drivers partially offsetting the higher costs associated per employee, reducing the overall impact," Ives said. "In other words, if per driver costs in California go up by ~30%, but Uber/Lyft impose shifts, and raise the hurdle to onboard a driver (thereby limiting training and other costs), it should limit the overall impact."
Any remaining extra costs are expected to be passed on to consumers or offset through cost cuts such as layoffs, the analyst said.
Santosh Rao, head of research at Manhattan Venture Partners, said if costs go up for Uber and Lyft and the ride-hailing companies have to pay for employee benefits, they will hire fewer drivers but those drivers will work longer hours.
Flexibility is key with gig economy companies, Rao added, since otherwise it might as well be a traditional job.
"It's not about economic stability. It's about flexibility with economic incentives," Rao said in an interview. "People like flexibility."
Ives said the negative impact to employment and flexibility for drivers is being understated, increasing the odds of a "middle-ground approach" through the November 2020 ballot measure.
"[The measure] would declare their drivers non-employees while establishing a new set of pay and benefit floors," Ives said.
However, implementing the California bill presents a challenge, he said.
The bill does not automatically reclassify workers but requires companies to use the "ABC test" to determine if a worker is an employee or an independent contractor.
According to the bill, a worker is considered an employee unless they meet the following three requirements: they are free from the control and direction of the company in connection with the performance of the work; they perform work that is outside the usual course of the company's business; and they are customarily engaged in an independently established trade, occupation or business similar to that of the work performed for the company.
Tony West, Uber's chief legal officer, said drivers fall into the second category.
"Several previous rulings have found that drivers' work is outside the usual course of Uber's business, which is serving as a technology platform for several different types of digital marketplaces," West said during a Sept. 11 call with reporters.
Michael Droke, a labor and employment lawyer at Dorsey & Whitney in California, said the law is intended to convert thousands of gig economy workers to employees.
"While Uber and Lyft come to mind, this law applies to any independent worker in California," Droke said in an email.
Employers who knowingly violate the statute could be subject to criminal penalties, Droke said, adding that other states could enact similar legislation.
Rao voiced a similar opinion.
"California has been a trendsetter in many areas," he said. "If [the rule is] there, then it'll slowly spread to other places as well."
New York has been proactive in creating rules for ride-hailing drivers, Rao said, including limiting the number of new gig economy drivers in the city.
In February, both Uber and Lyft sued New York City. Uber sued over the city's decision to cap the number of drivers operating on the streets, and Lyft sued for setting a minimum wage standard for its drivers. Lyft lost its petition in March.