Recent court ruling puts rideshare business models in jeopardy
10/07/2021
SF Examiner
Rideshare companies advocated for the passage of Proposition 22 like their very survival depended on it.
In some ways, it did. Uber and Lyft’s current business models depend on having a fleet of over 4 million drivers working as independent contractors, rather than as employees. Prop. 22 was designed to keep gig workers classified as independent contractors instead of employees under California law — something which had been threatened by a 2019 state assembly bill, AB5, designed to limit the parameters of independent contract work.
In the end, gig companies including Uber, Lyft, and food-delivery services like Doordash and Instacart, shattered state records by spending over $224 million to support Prop. 22. Since the companies recently have given up on other alternative business models — like having riders shuttled around by self-driving vehicles, or delving into consumer logistics — losing the fight over worker reclassification would be even more costly than the funding backing the proposition. But the expensive campaign worked and California voters passed Prop. 22.
It was all good for the rideshare firms. Until it wasn’t.
On Friday, Prop. 22 was declared unconstitutional and unenforceable in state Superior Court, beginning what will likely be a lengthy court battle putting the rideshare companies’ path to future profitability at serious risk. The ruling took issue with the law based on two technicalities.
First, the decision states that Prop 22 violated a provision in the state Constitution leaving issues of compensation for workers injuries to the California legislature. Second, additional language meant to curb driver unionizing violated a provision in the state Constitution that requires laws and initiatives to be limited to one subject.
Rideshare companies and their opposition both assume the decision will be appealed all the way to the California Supreme Court. If the ruling stands, Uber and Lyft’s drivers will have to become employees, and the companies’ current business models may be dead in the water.
“If you asked me five years ago to tell you two trends, one positive and one negative, that would really affect Uber’s ability to be profitable, the positive one would have been autonomous vehicles and the negative would have been worker classification,” says Bradley Tusk, one of Uber’s earliest advisors, stockholders, and now CEO and Founder of Tusk Ventures. He’s since sold his Uber stock, and says he’s glad he did, pointing to its uncertain path to profitability.
To be clear, Uber and Lyft have never been profitable. The companies often point to their EBITDA accounting numbers — “earnings before interest, taxes, depreciation and amortization” — to paint a rosier picture. But Uber loses about $4 billion per year when looking at pure revenue and operating costs, while Lyft lost $1.8 billion in 2020 and $2.6 billion the year prior. It wasn’t until the second quarter of this year that Lyft reached profitability, even when measured in terms of EBITDA. Uber has never reached profitability by this metric but has told shareholders it will by the fourth quarter of this year.
For years, the expectation was that Uber and Lyft would battle it out for control of the market, and by the time one became dominant, they wouldn’t have to pay for drivers at all. But Uber sold its self-driving car division to Aurora in December 2020, while Lyft sold its to a Toyota subsidiary in April. The reason? Self-driving research was far too costly and controversial, especially after one of Uber’s self-driving cars was involved in a deadly crash in Arizona. Both companies say they are still interested in the sector and are leaving open the possibility of partnering with a third-party autonomous vehicle company in the future.
When asked if they had an alternate path to profitability, spokespeople from both companies declined to comment. Tony West, a senior executive at Uber, drew attention when he sold 6,500 shares of Uber Technologies’ stock on July 2. But Uber and Lyft’s shares, which dropped 2.77% and 4% in early trading Monday off Friday’s news, recovered nicely by market close the same day, and gained 6% and 10% from the Monday dip by market close Wednesday.
Geoff Vetter, a spokesperson for the coalition that passed Prop. 22, called the Superior Court ruling “outrageous.” “We believe the judge made a serious error by ignoring the century’s worth of case law requiring the courts to guard the voters’ right of initiative,” he said.
Initially, many labor activists thought the rideshare companies wouldn’t be able to appeal the case, again on another technicality: The court case was brought by two unions against the state of California, rather than against rideshare companies. However, the Protect App-Based Drivers & Services Coalition, as well as executives from Doordash and Uber, were “intervenors” in the suit, meaning they have the right to appeal because they have a personal stake in the outcome.
Veena Dubal, a professor at UC Hastings who studies the gig economy and cowrote an amicus brief on behalf of the petitioners, is confident the state Supreme Court will uphold the Superior Court’s decision. She also thinks the rideshare companies can survive, and find a path to profitability, if they do.
“They would have to calibrate supply and demand, instead of having workers bear the burden of calibrating supply and demand,” she explains. Uber and Lyft have long described this as a loss of flexibility for drivers, who would no longer be able to turn on an app and start driving any time they chose.
Eliza McCullough, a research associate at the racial and economic equity-focused research institute PolicyLink, makes a similar argument. Uber and Lyft would have to change their business models should the Supreme Court side with the plaintiffs, but they would still find a path to profitability.
A recent study she authored argued that drivers, and particularly those that identify as Latinx, have disproportionately low rates of health insurance. According to the study, 16% of rideshare drivers didn’t have health insurance — double the national average — and only 10% were receiving a health care stipend offered under Prop. 22.
Her research surveyed members of Rideshare Drivers United, a SoCal group of drivers who have been demonstrating on behalf of better working conditions for rideshare workers since the proposition passed. “There’s a long history of corporations trying to turn majority people-of-color workforces into sub-employees with sub-minimum rights and pay,” she says. “Their current business model just depends on paying workers sub-minimum wages without benefits.”
The rideshare companies, for their part, say flexibility is why most drivers sign up for the job. Though they didn’t provide internal, more comprehensive data to contradict McCullough’s findings, Lyft provided its own survey data, which showed 77% of drivers had health coverage from another source, and that 94% are driving fewer than 20 hours a week, making Lyft a part-time job that wouldn’t be responsible for most benefits anyway.
Beyond drivers, Uber has more than 20,000 employees, while Lyft has at least 4,500. Significant portions of both workforces — a third of Uber corporate employees, specifically — work in the Bay Area. Headquarters for both cities are in San Francisco, and a severe hit to their business model will no doubt affect the local economy.
Uber spokesperson Austin Heyworth, however, seems confident. “We will appeal and we expect to win.”
SF Examiner: https://www.sfexaminer.com/news/can-uber-and-lyft-survive-without-prop-22/