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This Bill Could Destroy Uber's Unsustainable Business Model

An unholy alliance of on-demand companies is desperately trying to stop a California bill from reclassifying their independent contractors as employees.

by Edward Ongweso Jr
Jul 18 2019, 2:00pm

Image: JOSH EDELSON/AFP/Getty Images

Last week, the California Senate's Labor, Public Employment and Retirement Committee held a hearing and passed Assembly Bill 5 (AB5), which promises to make it harder for companies to claim workers are independent contractors and increase the operating expenses of Uber, Lyft, and other on-demand companies that already find themselves unable to turn a profit.

Written by Assemblywoman Lorena Gonzelez (D-San Diego), AB5 codifies the California Supreme Court’s unanimous May 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles where an “ABC test” was introduced to determine whether a worker was an employee or an independent contractor. Individuals with sufficient control over how and when they did their work are independent contractors, while workers without much control are employees.

While AB5 easily passed in the Assembly this May, 53-11, it has a long and ugly fight ahead of as it must pass multiple votes in the Senate then be signed into law by Governor Gavin Newsom. Each step of the way is an opportunity for companies like Uber and Lyft to intervene and extract concessions. Newsom has been evasive about whether he’ll side with his long-time political supporters in the Bay Area or his deep bench of union endorsements, which filled his gubernatorial campaign war chest with millions.

Shortly after AB5 passed the Assembly vote, Uber's CEO Dara Khosrowshahi wrote an op-ed in the San Francisco Chronicle with Lyft's co-founders Logan Green and John Zimmer titled, "Uber, Lyft ready to do our part for drivers." In their op-ed, they declare that "our companies are no longer upstarts,” but are now “public companies that tens of millions of people rely on for mobility and for work." In response to the waves of protests, strikes, and regulatory backlash targeting their exploitative business model, the trio argues that the real problem lies with "century-old employment laws."

Over the past few months, Uber and Lyft, along with other companies like DoorDash and Postmates, have tried to negotiate with unions and propose alternatives to AB5. The major alternative proposed is a third category for worker classification. This third category would be a chimera where workers could remain independent contractors but gain some of the benefits and protections expected for employees.

While these companies are united in supporting the third category in the name of a flexible work schedule, workers and unions are not. The California Labor Federation (CFL), a group that represents most of California's unions and over 2.1 million workers, is firmly opposed to anything other than AB5. In New York, attempts by the State Federation of Labor to craft a bill that worked similar to the proposed third category were lambasted by Hector Figueroa, then-president of New York's Service Employees International Union chapter.

Undeterred, Uber and Lyft have managed to patch together a coalition of driver support, thanks in part to a manipulative campaign where they sent out a vague petition using their apps prompting drivers to "fight for driver flexibility and independence." Drivers later revealed they did not know what the petition was for and did not think they were able to opt-out of signing it. The companies sponsored a counter-protest outside the Capitol Building in Sacramento as the hearing went on. Drivers organized by the California Chamber of Commerce and a coalition of groups that worked closely with Uber and Lyft against AB5 not only were helped in putting together a rally on the day before but paid $25 to $100 to attend.

Uber, Lyft, DoorDash, and Postmates derive a huge share of their sales from California: 41 percent of all Postmates' US sales are in California, 27 percent with DoorDash, 24 percent of Lyft's rides, 17 percent of Uber's rides, and 13 percent of UberEats' sales. When Tony West, Uber's general counsel and chief legal officer, was asked whether AB5 was an existential threat to Uber, he literally laughed then listed some (but not all) of Uber’s past scandals like its numerous lawsuits, toxic workplace culture, and massive data breach in 2016, the implication being that the company could survive if it became law.

The real threat is that AB5 could become a model everywhere. Let’s take Uber, for example. Before Uber went public, it filed and released an S-1 form, a document laying out all the information necessary for investors to clearly understand a company’s operations. Uber’s section dedicated to potential risks was particularly interesting. In it, Uber said its business would "be adversely affected if drivers were classified as employees instead of independent contractors" because it "generate[s] a significant percentage" of its gross revenue from five metro areas: Los Angeles, New York City, the San Francisco Bay Area, London, and São Paulo.

Uber has never made a profit and has actually lost over $14 billion in the last four years alone. In the prospectus, Uber insists that these five major metropolitan markets are essential to its path to profitability. In reality, what Uber actually relies on is the $20 billion in funding raised over the past decade and the $8 billion in new investments after going public in May. This investor welfare covers the cost of low prices that render each rideshare trip unprofitable, of driver incentives to combat the high turnover rate of drivers, and of promotions used to drive up demand.

The investors have continued piling that money onto Uber because they believe Khosrowshahi when he talks about becoming the “Amazon of transportation” or the platform on which all transportation happens. In other words, a monopoly. After achieving a monopoly, some commentators warn that Uber will then charge whatever price it wants and use its dominant position to both pay back investors and kill potential competitors. As an added bonus, Uber promises it will turn its labor costs to zero by deploying a fleet to autonomous vehicles (which may prove to be difficult to widely adopt). That is Uber’s path to profitability.

Equity research analysts at Barclays project Uber is on track to lose $3.9 billion in 2019 and if AB5 were passed, it would cost the company upwards of an additional $500 million. A drop in the bucket. But if AB5 were to become law and other states follow California's example and pass similar laws, it could constrict these companies' already narrow paths to profitability. Investors saw no clear path to profitability in Lyft’s S-1. Postmates hopes to use the money generated from going public to expand geographically and achieve profitability. DoorDash says it’s profitable (if you don't include overhead expenses like salaries and rent). If nationally adopted, the investors behind each of these companies could cash out and bankrupt them. AB5 isn’t an existential threat, but it will cause one.