From Gig to Gone

Uber and Lyft Threaten to Leave California over AB5

Last September I wrote a blog post entitled “California and the Death of the Gig Economy” about California Assembly Bill 5 and the reclassification of contractors as employees. I had my concerns over how companies like Uber and Lyft would react to AB5 and the cost overloads of suddenly having a million new employees added to their balance sheet. Would Uber ramp up automation? Would fares go up? There was also the risk of them up and leaving. So how did it turn out?

Uber and Lyft initially fought back against AB5: The companies, along with DoorDash, filed paperwork in late 2019 for the Protect App-Based Drivers & Services Campaign, a California ballot measure that would create an exemption to AB5 for app-based driver contractors. In 2020, Uber altered its app in an attempt to circumvent the law, letting drives set their own payment rates.

Neither measure worked and this past May California sued the ride-sharing companies to make their contractor drivers into employees. Three days ago, on August 10, 2020, a California judge ruled that Uber and Lyft must comply with AB5 immediately.

So, to recap: A company developed an app and service to bring a lower cost service to consumers. People begin to work for the company to provide said service and were compensated for doing so. The same people now want more, so they go to their state representatives to pass law to force the company to give them more. As California Assemblywoman Lorena Gonzalez put it, “It makes sure that the one million independent contractors in California get the wages and benefits they deserve.” 

This was from my blog post last year:

From the first glance here it appears Assembly Bill 5 could have disastrous effects on personal income in the state of California. People working as contractors on their terms will be forced to conform as an employee or lose out on their former gig. Jobs could be lost to automation. Some companies may up and move, taking their jobs with them or choose to cut back because they can’t afford to take on these contractors as employees. 

And what happened?

Faced with the massive tidal wave of increased costs for operating in the state of California, Uber and Lyft announced that they’re leaving California. From The Verge:

Lyft said it would shut down operations in California if forced to classify drivers as employees, the company’s executives said in an earnings call with investors on Wednesday. Lyft joins Uber in threatening to pull out of one of its most important US markets over the question of drivers’ employment status…

Both companies have said they would appeal the ruling, which was stayed for 10 days.

But if their appeals fail, Lyft may join Uber in closing up shop in California, the company’s president John Zimmer said. “If our efforts here are not successful it would force us to suspend operations in California,” Zimmer said on a call announcing the second quarter earnings of 2020.

To some, it may look like a grumpy former startup is taking their ball and going home. This article from The Hill has comments full of vitriol toward the “greedy corporations” “extorting” California. Some in the comments call for revoking business licenses for Lyft and Uber — it’s a lot like saying “you can’t quit because you’re fired!”

It’s easy to see why Californians are mad. Scores of Lyft and Uber drivers thought they would suddenly get benefits, paid time off, and a minimum wage are now getting nothing at all if these companies shut down. Don’t forget: these companies have never had a quarter of profit! There’s also the unmentioned damage COVID-19 and the lockdown has done to their businesses. Lyft suffered a 61% revenue drop in the second quarter this year while Uber experienced only a 29% decrease, buoyed by Uber Eats delivery while people were stuck at home.

You can’t get blood from a turnip.

I just don’t see how adhering to AB5 could possibly work at this point. As of March 25, 2020 Uber had about $7 billion in debt (Lyft currently has none). With already not being profitable and suffering corona-related revenue drops, Uber would be forced to borrow more to cover the increased costs associated with converting contractors to employees in California. The choice here is essentially an existential one: Does a company with $7 billion in debt that’s never had a profitable quarter take on more debt to conform to California’s AB5 or do they cut the market loose and spare the debt load? If they take on increased debt to cover 2020’s employee expenses during a pandemic year where they most definitely won’t turn a profit, they’ll have to borrow more again next year to for 2021’s employee costs. They would go deeper into debt with larger debt-servicing payments cutting into yearly expenses against falling revenues.

Even without a current debt load, Lyft would likely have to do the same. After all, these are sudden costs for which money wasn’t previously allocated. Debt would have to be taken on to finance the costs. It becomes existential for Lyft as well. And what if the companies cave to California’s demand and it embolden’s other states to pass their own version of AB5?

The fallout from this will impact millions. All the Uber and Lyft drivers who drive or work for these companies will lose income if the companies shut down (or relocate). To continue to drive for Uber or Lyft these contractors would have to move to a state where they still operate. Less income means less taxes taken in locally and federally from these contractor’s yearly 1099s. This puts California deeper in the current tax revenue hole. Uber — publicly traded as of last year — stock has taken a hit on the ultimatum, reducing the value of retirement accounts and personal brokerage accounts that hold shares.

It will be interesting to see how this plays out, but it does not look good. I wonder if taxi drivers are the only ones celebrating here.

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