California Is Jeopardizing Uber And Lyft’s Business Model

But also that of all the actors of the gig economy…

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Photo by Thought Catalog on Unsplash

The decision taken by the California Assembly on September 11, 2019 may well be a landmark and mark the beginning of a radical change in the business model of gig economy companies.

Thus, from 1 January 2020, drivers who worked as self-employed for platforms such as Uber or Lyft will have to be considered as employees as long as they work mainly and regularly for these companies.

Such a requalification was feared by many investors for several months on Wall Street, which explains the poor performance of Uber and Lyft shares since their IPOs made earlier in 2019.

A Requalification That Changes Everything

In concrete terms, this requalification will enable drivers to benefit from the social protection they were deprived of until now, which includes in particular:

  • Unemployment insurance
  • Health insurance
  • Pension
  • Maximum working hours and minimum wages

For California Assembly, the stakes were high because the self-employed status of drivers until now represented a $7 billion annual tax shortfall.

As the drafter of this bill, Democratic MP Lorena Gonzalez said

“As lawmakers, we will not in good conscience allow free-riding businesses to continue to pass their own business costs onto taxpayers and workers. It’s our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs.”

Lorena Gonzalez’s position is confirmed by a study published by the Economic Policy Institute in May 2019 that revealed that the median wage for Uber and Lyft drivers was $9.21 per hour. This figure is well below the $15 minimum wage in California.

California Senator Maria Elena Durazo also hammered the nail in, saying:

“Let’s be clear, there’s nothing innovative about underpaying someone for their labor and basing an entire business model on misclassifying workers.”

According to Morgan Stanley, this decision by the California Assembly to give Uber and Lyft platform drivers employee status will increase the costs of the two leading applications by at least 35%!

This is a major blow to the business model of these platforms, which are symbols of the gig economy. Its repercussions will be very broad since the other platforms are naturally also impacted.

To adapt, the Uber and Lyft platforms will necessarily have to reduce the flexibility of the drivers and with it, the number of cars available at any time. This real earthquake should cause an increase in the price of the trip, which has already risen sharply in recent months.

A Movement That Could Be Followed By Other US States And Countries

The threat is great for Uber and Lyft to see other US states follow California Assembly’s lead. Worse still, other countries could follow suit and vote for the same type of obligations.

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Evolution of the Lyft share price since its IPO

All this is part of an already difficult period for Lyft and Uber. As a result, Lyft’s stock market valuation has dropped by nearly 45% since its IPO in March 2019. At Uber, the company’s valuation has declined by nearly 25% since its IPO in May 2019 when the company announced losses of more than $5 billion in the second quarter of 2019!

Uber, which claims to employ 27,000 people worldwide, has already embarked on a major plan to reduce its workforce in order to improve performance and flexibility in the coming months. It will have to be seen whether this attempt at rationalization is enough to relaunch Uber in an increasingly tense context.

At this time, the California Assembly has yet to consider some of the amendments introduced by the Senate, after which the law will have to be signed by Governor Gavin Newsom, who has already proclaimed loud and clear that he supports the law.

Thus, it is indeed the entire business model of Uber and Lyft, but more generally that of all the platforms of the gig economy, which is in peril!

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