A bill passed by the California Assembly seems likely to classify Uber and Lyft drivers as employees, instead of their current status as independent contractors. Under guidelines laid out in the bill, which is now with the state senate, ride-hail drivers would likely fail the contractor test because they don’t perform work “outside the usual course of the hiring entity’s business.” Put another way, drivers drive, and driving is essential to Uber and Lyft.
On June 12, Uber’s and Lyft’s top executives took the extraordinary step of co-authoring an op-ed in the San Francisco Chronicle that pushes back on the bill and promises to improve work quality and job security for their drivers. The rare public alliance between Uber CEO Dara Khosrowshahi and Lyft co-founders Logan Green and John Zimmer, whose companies are bitter rivals in the US, is the clearest sign of how seriously these companies are taking the legislative threat.
Uber’s and Lyft’s businesses, valued together at nearly $100 billion by the public markets, depend entirely on the view that their drivers are independent contractors and not employees. Why? Employees are expensive—for loss-making Uber and Lyft, perhaps prohibitively so. Employees are protected by federal and local minimum wage laws. They also get health care benefits, and their employers pay various taxes toward social security, unemployment, and other social services.
What’s more, if drivers were employees they could form a union and bargain collectively. They would likely have less flexibility with their schedules, and be less able to work for multiple platforms, as many now do. For now, though, let’s focus just on the costs for the companies.
In a report earlier this week, equity research analysts at Barclays estimated that reclassifying workers could cost Uber and Lyft an additional $3,625 per driver in California. That’s enough to boost Uber’s annual operating loss by more than $500 million and Lyft’s by $290 million. “Any wide-scale reclassification of drivers to employees would be a material negative for ride-hailing and further put into question the long term profitability of the industry,” the analysts wrote.
Let’s break it down. First, Barclays looked at the additional payroll taxes and training costs Uber and Lyft would have to pay if their drivers became employees. Barclays based its estimates on a part-time driver who averages $15,600 a year in ride-hail income ($20 an hour for 15 hours a week, 52 weeks a year).Barclays estimates Uber has 140,000 drivers in California and Lyft 80,000. That implies that Uber would owe about $222 million in payroll taxes and training costs each year, and Lyft $127 million, if drivers were considered employees.
Next, Barclays broke out costs related to California workers compensation insurance, which employers in the state are legally required to provide. At a midpoint rate for the taxi and limousine industry, Barclays estimates both Uber and Lyft are looking at another $2,040 per employee per year, which works out to about $286 million and $163 million for all drivers each company has in the state, respectively.
Add the payroll taxes to the worker comp cost, and you get a total annual employee-related cost of about $508 million for Uber and $290 million for Lyft, or $3,625 per driver.
Such costs would be a significant hit to both companies. Uber reported an operating loss of $1 billion in the first quarter of 2019. Barclays expects the company to post an operating loss of $3.9 billion for the full year, 30% more than the $3 billion loss in 2018. If drivers were to become employees in California, Barclays thinks that Uber’s 2019 operating loss would widen to $4.4 billion.
The relative impact is even worse for Lyft, which operates only in the US and therefore has more risk concentrated in California. As things stand, Barclays expects Lyft to lose $1.2 billion in 2019, versus a loss of $980 million the year before. If drivers were to become employees, however, Barclays thinks that loss could climb to $1.5 billion this year.
Both Uber and Lyft warned in their investor prospectuses before going public that their businesses would be adversely affected if drivers were classified as employees instead of independent contractors. Uber noted such a change would lead to “significant additional expenses”—potentially including minimum wage, overtime, meal and rest period requirements, employee benefits, payroll taxes, and social security contributions—and “require us to fundamentally change our business model.” Lyft cautioned that it may need to “revise our pricing methodologies to account for such a change to driver classification.”
In other words, if drivers are deemed employees in the state of California, the companies will probably pass some of the cost onto customers by making rides more expensive.