California's decision to pass legislation that reclassifies gig workers as employees sounds expensive for ride-hailing companies Uber and Lyft.
If hundreds of thousands of drivers receive protection such as minimum wages and paid time off, operating losses will soar.
Leaving California is not an option. Deutsche Bank estimates California accounts for one-fifth of Lyft's bookings. For Uber, which has drivers around the world, it is around 6 per cent.
Driver employment status was flagged as a risk when both companies listed this year.
Even so the timing is bad. Both are under pressure to cut costs. Their shares trade way below listing prices. Uber is trying to show it has a streamlined operation. It trimmed its 27,000 strong workforce recently. Adding a portion of its 3.9 million drivers to the mix would not help.
No problem, says Uber. Assembly Bill 5 will not turn drivers into employees because it will not apply. Uber is a tech company. Drivers do not make algorithms. Ergo, their work is outside Uber's business.
This line of argument is weak. If Uber thought otherwise, it would not have joined forces with Lyft and DoorDash on a plan to spend US$90 million ($140.6m) towards a ballot initiative that would make the companies exempt.
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Nor does it work for Uber to argue that drivers prefer to stay contracted, rather than accept mandated hours as employees. AB5 does not demand employees receive set hours.
Replacing humans with robot cars would solve Uber's problem. But autonomous vehicles may be decades away. If Uber wants to keep its drivers as contractors and avoid lawsuits, the answer is to pay more.
The median hourly pay with tip for Uber drivers in the US is US$14.73, according to a study by Ridester.
After expenses like insurance, drivers make under US$10. A driver working 40 hours per week earns over US$20,000 after expenses. Amazon has raised its minimum hourly rate to US$11. Walmart promises to pay US$15 next year. Higher income will make drivers happier and reduce churn.
Raising rates will slow revenue growth. The upside is that rival ride-hailing companies face exactly the same costs.
Lex is a premium daily commentary service from the Financial Times
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