How Uber and Lyft’s economic battle over drivers ends

How Uber and Lyft’s economic battle over drivers ends

The Uber app with a map of New York City is seen on an Apple iPhone mobile phone in this photo illustration Warsaw, Poland on September 21, 2022.

Nurphoto | Nurphoto | Getty Images

In a way, Uber and Lyft are back to square one.

With federal regulators set to tighten Trump-era labor standards that have allowed Uber and Lyft, as well as food delivery services like Doordash, to treat gig workers as independent contractors with few protections under labor law, sent stocks plummeting last week. But while the shift is in place, the Labor Department’s proposal does not immediately convert gig workers into employees entitled to overtime pay, unemployment insurance and other benefits.

What is clear is that the ongoing conflict over how these on-demand companies treat their drivers is not going away, because it is estimated that one in six Americans has worked in the gig economy one way or another. Analysts and experts who follow the rideshare industry see the future as a series of compromises that will give drivers at least limited benefits — a model known as independent contractor-plus — with some believing the Biden administration’s pro-union stance will lead to workers being classified as employees in the end .

Both solutions would likely grow Uber and Lyft’s costs — and create a different business model for entrepreneurs who use their cars to run, in effect, their own small businesses. And each underscores the unfulfilled promise of ride-sharing business models: the absence of self-driving cars that investors once believed would boost company profits and put most drivers out of work.

“It feels like the beginning of a Game of Thrones battle between the Department of Labor and the Economy,” Wedbush analyst Dan Ives said. “When the pressure was limited to states, that was one thing. It added another variable.”

For now, the DOL’s proposed rules would not make drivers employees, who would also be entitled to benefits such as minimum wage protection, overtime pay and to be paid when they are on the job and have no passengers. in their car. Such a move would also likely put pressure on companies to offer drivers health insurance and vacation pay, especially for the minority of full-time drivers, though Morgan Stanley analyst Brian Nowak says state-level litigation could also cause that to change. .

Uber, Lyft shares split after Labor Department announces proposal on gig workers

For now, the DoL rules will apply a broader set of tests to determine who is a truly independent contractor and who is not. The companies tout rideshare’s hiring flexibility, which allows drivers to set their own hours, as a sign that drivers are independent contractors. Advocates for treating drivers as employees argue that Uber and Lyft set workers’ wages, send them on trips and monitor their performance as closely as employees, even using technology to ask passengers mid-ride if their driver is misbehaving based on the vehicle’s speed.

Federal policy change, mostly a return to the status quo under the Obama administration (and most of the Trump years, since the last administration did not relax the rules until early 2021), comes at a delicate time for both rideshare companies.

Each promised Wall Street that they would soon become profitable. By some standards — especially softer earnings before interest, depreciation and amortization — they succeeded. But neither makes money under formal accounting standards, and neither has had positive free cash flow in the last 12 months, although Uber was positive in the second quarter.

Both companies have been affected by the Covid pandemic, which has caused both drivers and passengers to use car services much less frequently. Each company lost more than half of its value in 2020, rebounded to new highs by last year, and stocks rebounded in 2022.

And that pain is being passed on to drivers, whose wages have been cut since before the pandemic, said Nicole Moore, president of Rideshare Drivers United in Los Angeles and a rideshare driver herself.

“They got America hooked on cheap rides and the drivers on what they got,” Moore said. “Now passengers pay more and drivers pay less.”

Uber believes the Department of Labor is less focused on ride-sharing and more on industries like construction that also use gig workers, noting that the proposed rule does not single out ride-sharing drivers.

“The Ministry of Labor listened to the drivers, who consistently and overwhelmingly state that they prefer unique flexibility it comes with an independent contractor,” Uber’s head of federal affairs CR Wooters said in a statement. “Today’s proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially.”

The company also disputes Moore’s claims. It says driver pay has risen to $37 per what Uber calls an hour used. The company’s 10-Q filings don’t disclose the average utilization rate — or the percentage of hours a car carries passengers while the driver is on the clock — but Sergio Avedian, a senior associate at industry blog The Rideshare Guy, said it was about 60%. Uber drivers also supply their own cars and gas, though the company in March added a per-trip fuel surcharge that goes directly to drivers.

Uber and Amazon Flex drivers protest fuel price hikes and demand more money outside an Amazon warehouse in Redondo Beach, California, on March 16, 2022.

Mike Blake | Reuters

The risk of a changing legal environment is pushing companies toward a new kind of business model, similar to what happened in Washington state already under the new law, said Avedian, who is a driver for both Uber and Lyft.

In Washington, drivers are still considered contractors, but Seattle drivers are guaranteed $1.65 per mile, which he said is more than double the prevailing rate in California, which will take effect Jan. 1 (Rates will be lower in other parts of Washington). They will also receive compensation insurance, paid time off and the right to appeal if the companies effectively terminate them.

“The only reason to be involved in the gig economy is flexibility,” Avedian said, referring to policies that allow rideshare drivers to set their own hours. “Uber is not going to do that and give you employment rights. If you put [health insurance, Social Security taxes and other benefits] Uber will drop to zero.”

New Jersey, New York and Massachusetts are working with companies on deals similar to the one reached in Washington, Nowak said. Uber and Lyft have handled the new requirements in Washington with little impact and would be able to weather any hit to profits as the model expands, he wrote.

“Getting agreement in those states was important 24 hours ago (prior to this announcement), and it still is today,” Nowak said of the DoL rule proposal.

Both companies have said they are willing to work on such deals with state regulators, trading better pay for continued flexibility that independent contracting allows the companies. “It’s up to us to make it attractive to drivers, because they have a lot of options,” said Uber spokeswoman Alix Anfang, referring to the tight labor market.

Surveys by The Rideshare Guy also show that most drivers prefer to work as independent contractors.

Any increase in costs from classifying drivers as employees, or otherwise increasing their pay, is likely to be offset in higher prices as companies have already sharply reduced their fixed costs, CFRA Research analyst Angelo Zino said. How much costs could rise is not known, but the range of possibilities ranges from 10 to 30 percent, he said. Uber is also targeting advertising revenue, which can generate as much as 20 percent of the company’s profit before interest, taxes and non-cash expenses within three years, he said.

The need to prevent drivers from claiming full-time benefits, if regulators ever classify them as employees, will likely mean companies pressure drivers to work less than full-time, Moore said. Companies like Amazon that also use quasi-independent drivers may face some of the same problems as Uber and Lyft, Nowak said.

All of this would matter less if companies were closer to deploying self-driving vehicles on a large scale, allowing them to reduce driver costs. Uber’s federal filings ahead of its 2019 IPO predict the company will become a hybrid of automated and human-driven transportation, and Lyft’s filings say self-driving cars will be a “critical part of the future of transportation.”

Last week, Lyft President John Zimmer, who previously predicted a majority of self-driving cars by 2021. he said got it wrong, but added, “I really think in the next two to three years, that kind of actual driverless vehicle will be something that you can pretty easily order on the Lyft platform.”

All workers will likely remain on stage, and their business models will change, Avedian said. The question is whether it will change fast enough for drivers and regulators.

“If implemented, we will have the status, benefits and wages that employees are guaranteed by law,” Moore said. “99 percent of drivers want to be independent – but we’re not.”

Join us October 25-26, 2022 for the CNBC Work Summit — Dislocation, Negotiation and Determination: The World of Work Right Now. Visit CNBC Events to register.

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