Why Uber and Lyft Are Pushing to Keep Their Drivers as Independent Contractors

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David Jagielski, The Motley Fool

Updated Sat, Sep 7, 2019, 6:03 PM

Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), and DoorDash are working toward a common goal: keeping their drivers from becoming recognized as employees. Currently, they are treated as independent contractors, which is less costly for the companies, and if that changes, it could result in higher expenses for the aforementioned companies. It shouldn't come as a surprise, then, to learn that the three companies would be spending a combined $90 million to try to stop a bill in California that could have a big impact on their financials.

Changing the definition of employee

Assembly Bill 5 (or "AB 5") could change things not just for Uber and Lyft, but for other industries as well. Under the bill, in order for a worker to be considered an independent contractor rather than an employee, all three of the following criteria would need to be met:

The worker would have to be free from the company's control.
The work being done can't part of the company's core operations.
The worker would need to have an independent business in the industry.

While Uber and Lyft drivers likely would meet the first condition, it's likely they wouldn't meet the other two requirements. The proposed test is much more straightforward than what's currently in place in California: There are more than 10 different factors that are taken into consideration when determining whether a worker is an independent contractor.

Image source: Uber.

For drivers, being classified as employees will mean that they will be able to receive sick days, have minimum-wage protections, and be eligible for other benefits that would not be available to independent contractors. It would certainly add significant costs for these companies.

Back in May, The New York Times reviewed a decision where the National Labor Relations Board sided with Uber in this dispute, saying that the drivers were indeed independent contractors. In a memo issued by the agency, its general counsel had stated, "The drivers had significant entrepreneurial opportunity by virtue of their near complete control of their cars and work schedules, together with freedom to choose login locations and to work for competitors of Uber."

However, in California, with different factors to consider under AB 5, things could change very quickly for drivers if the bill ends up passing. Uber, Lyft, and DoorDash are spending the $90 million on a ballot initiative that would see them offering drivers some concessions, such as minimum wage, health benefits, and bargaining rights.If successful, the initiative would allow the companies to be exempt from the bill, and they would avoid having to classify their drivers as employees.

Is it worth it?

The vote on AB 5 is expected to happen later this month, and so time is of the essence for these ridesharing companies to come up with a solution. With a loss of more than $5 billion in Uber's most recent quarter, spending $30 million is a nominal amount in light of what's at stake -- labor costs potentially rising by as much as 30% in California and any other state that follows in its footsteps. During the quarter, the company incurred $1.74 billion in costs related to its revenues, which included driver-related expenses. This was more than half (54%) of the $3.2 billion in revenue that Uber generated during the period and could get bigger if labor costs rise. However, given its proposed ballot measures, it's likely that the company will see its costs rise in any event.

With Uber and Lyft both burning through lots of cash, it could make things even direr for the companies if the drivers end up being classified as employees. While the decision would impact only California, it could lead to movements across the country as this has been a hot issue for a while.

One of the advantages Uber has had over traditional taxis is its low price point, and if it needs to increase its rates to cover for higher wages, its advantage could be negated and hurt its competitiveness in the market.

What does this mean for investors?

The key advantage for Uber and ridesharing companies has been their flexibility and being able to have almost anyone being able to drive for them while they are able to keep costs low since they're online bringing on contractors and not employees. However, by turning those drivers into employees, that flexibility could be gone since there's much more of a vetting process when it comes to hiring employees than there is contractors. With that comes more hiring-related expenses, in addition to the rising benefits costs that will be incurred as well. And with both companies posting significant losses, the last thing investors will want to hear is that their costs are going to get even higher.

Raising prices could help to offset those issues, but will simultaneously make Uber and Lyft less compelling options for consumers. That's why the long-term success and growth of these companies could be dependent on what happens with how their drivers are classified and why the companies are spending so much to keep avoid the fate of AB5

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com

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