How the Uber and Lyft gig economy battle ends over drivers

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

Nurphoto | Nurphoto | Getty Images

In some ways, Uber and Lyft are back to square one.

As federal regulators move to tighten Trump-era labor standards that allow Uber and Lyft, as well as food delivery services like Doordash, to treat gig workers like independent contractors with little protections under employment law, shares fell sharply last week. But while this is a change, the Department of Labor’s proposal does not immediately turn construction workers into employees entitled to overtime pay, unemployment insurance and other benefits. .

What’s clear is that the ongoing dispute over how these on-demand companies treat their drivers isn’t going away, as it’s estimated that one in six Americans have worked in the gig economy in some way. or another. Analysts and experts who follow the ridesharing industry believe the future holds a series of trade-offs that will give drivers at least limited benefits – a model known as independent contractor plus – with some believing the pro position The Biden administration’s union will lead to the classification of workers. as term employees.

Both solutions would be likely to increase Uber and Lyft’s costs – and creating a different business model for entrepreneurs using their cars to, in effect, run their own small businesses. And each highlights the unfulfilled promise of ride-sharing business models: the absence of self-driving cars that investors say will skyrocket corporate profits and bankrupt most drivers.

“It looks like the start of a Game of Thrones battle between the Department of Labor and the labor economy,” said Wedbush analyst Dan Ives. “When the pressure was confined to the states, that was one thing. He added another variable.”

For now, the DOL’s proposed rules will not make drivers employees, who would also be entitled to benefits such as minimum wage protection, overtime pay and to be paid while on the job but do not have a passenger in their car. Such a move would also likely lead to pressure on companies to offer drivers health insurance and vacation pay, especially for the minority of drivers who work full-time, although Morgan Stanley analyst Brian Nowak said state-level litigation could also force such a currency.

For now, the DoL rules will apply a broader set of tests to determine who is a truly independent contractor and who is not. Companies point to the flexibility of ridesharing employment, which allows drivers to set their own hours, as a sign that drivers are independent contractors. Advocates for treating drivers as employees say Uber and Lyft set workers’ wages, allocate them to rides, and monitor their work as closely as they would an employee, even using technology to ask passengers halfway through if their driver acts erratically. depending on the speed of a vehicle.

The shift in federal policy, largely restoring the status quo under the Obama administration (and most of the Trump years, since the last administration only relaxed the rules in early 2021), comes at a delicate time for the two carpooling companies.

Each promised Wall Street that it would soon become profitable. By some standards, especially the more lenient earnings before interest, taxes, depreciation and amortization, they have achieved this. But neither is making money by formal accounting standards, and neither has had positive free cash flow in the past 12 months, although Uber was positive in the second quarter. .

Both companies have been hammered by the Covid pandemic, which has meant drivers and passengers are using car services much less often. Each company lost more than half of its value in 2020, hit new highs last year and saw its shares beat again in 2022.

And that pain has been passed on to drivers, who have seen their wages drop since before the pandemic, said Nicole Moore, president of Rideshare Drivers United in Los Angeles and a rideshare driver herself.

“They got America addicted to cheap rides and drivers addicted to what they got paid,” Moore said. “Now passengers pay more and drivers are paid less.”

Uber believes the Department of Labor is focusing less on carpooling and more on industries such as construction that also use gig workers, stressing that the proposed rule does not target rideshare drivers.

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

The company also disputes Moore’s claims. He says driver pay has increased to $37 per what Uber calls an hour used. The company’s 10-Q filing doesn’t disclose an average utilization rate — or the percentage of hours a car carries passengers while a driver is clocked — but the company’s senior blog contributor Sergio Avedian industry The Rideshare Guy, said it was about 60%. Uber drivers also provide their own cars and gasoline, although the company added a per-ride fuel surcharge in March that goes directly to drivers.

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

Mike Blake | Reuters

The risk of change in the legal environment is pushing companies toward a new type of business model, similar to what has already happened in Washington state under new law, said Avedian, who is he -same driver for Uber and Lyft.

In Washington, drivers are still considered contractors, but drivers in Seattle are guaranteed $1.65 a mile, which he says is more than double the going rate in California, effective March 1. next January (rates will be lower elsewhere in Washington). They will also benefit from workers’ compensation insurance, paid holidays and the right to appeal if they are indeed laid off by the companies.

“The only reason to be involved in the gig economy is for 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] in, Uber will go to zero.”

New Jersey, New York and Massachusetts are working with the companies on agreements similar to the one struck in Washington, Nowak said. Uber and Lyft have weathered the new demands in Washington with little impact and would be able to weather any hit to earnings as the model spreads, he wrote.

“Reaching an agreement in these states was important 24 hours ago (before this announcement), and it still is today,” Nowak said of the DoL rule proposal.

Both companies said they were willing to work out such deals with state regulators, trading better pay to continue the flexibility that freelance contracts allow companies. “It’s up to us to make it attractive to drivers because they have a lot of options,” Uber spokeswoman Alix Anfang said, referring to the tight job market.

The Rideshare Guy surveys also show that most drivers prefer to be independent contractors.

Any increase in expenses resulting from classifying drivers as employees or increasing their salaries is likely to be recouped in the form of higher prices, as companies have already cut their fixed expenses sharply, said Angelo Zino, analyst at CFRA Research. It’s unclear how much the costs may increase, but the range of possibilities is 10% to 30%, he said. Uber is also looking for advertising revenue, which could generate up to 20% of the company’s earnings before interest, taxes and non-cash expenses within three years, he said.

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

All of this would matter less if companies were closer to implementing self-driving vehicles at scale, which would have allowed them to reduce the cost of drivers. Uber’s federal disclosures ahead of its 2019 IPO predicted the company would become a hybrid of automated and human transportation, and Lyft filings said self-driving cars would be “an essential part of the future of transportation.” .

Last week, Lyft President John Zimmer, who previously predicted the majority of self-driving by 2021, said he was wrong, but added, “I really think in both Over the next three years, this kind of self-driving, self-driving vehicle will be something you can order quite easily on the Lyft platform.”

Gig workers will likely stay on stage and their business models will change, Avedian said. The question is whether they will change quickly enough for drivers and regulators.

“If this is enforced, we will have guaranteed employee status, benefits and pay under the law,” Moore said. “99% of drivers want to be independent, but we are not.”

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