Uber says it is a technology company, but California courts might say otherwise
By Laura Forman
Sept. 23, 2019 7:00 am ET
Uber ’s valuation might now be in the hands of California’s courts.
Earlier this month, the state’s Assembly and Senate passed a bill that might affect how gig companies classify their workers. Future court rulings based on the new bill, which would go into effect in January, could eventually raise costs for Uber substantially.
The company’s valuation already sits somewhere between a technology company and the transportation business. The determination of the California law could tip the scales, which would swing the returns for shareholders who have taken a flier on ride-sharing.
California’s bill could force Uber to reclassify independent contractors as employees, but it wouldn’t automatically do so. Instead, the bill codifies a three-part test that a company would need to pass to keep employees at arm’s length. Perhaps the most onerous arm of the test states that, to be an independent contractor, a worker must perform a service outside the usual course of the company’s business.
Under the new test, ruling drivers as employees would mean California courts interpret Uber’s core service to be transportation, not technology. Previous rulings on this topic have been mixed and ambiguous. In 2015, a California district court noted that not classifying Uber as a transportation company “strains credulity.” Later, a 2018 California arbitration ruling found that Uber wasn’t in the business of providing rides because it didn’t make commitments to provide riders a ride, nor drivers a rider. That ruling was subsequently held up in the Los Angeles County Superior Court.
Uber’s future valuation might hang in the balance. The company has shed more than one-quarter of the market value from its listing in May, and the stock is now trading in limbo, somewhere between a tech platform and a transportation company. At just over 3 times forward sales, Uber’s shares trade at a discount to those of Alphabet Inc. and Facebook Inc., but a significant premium to transportation players like J.B. Hunt and Landstar, both of which are hovering just above 1 times forward sales. Rental car companies, meanwhile, like Hertz Global Holdings and Avis Budget Group , trade at around 0.2 times.
Classifications outside of California could be telling. In December of 2017, the Court of Justice of the European Union ruled that Uber must be classified not as an information technology service, but as a transportation service. Similarly, earlier this year, the S&P classified Uber and competitor Lyft as trucking companies. In Lyft’s case, it noted that the company generated nearly all of its revenue from its ride-sharing marketplace that connects drivers and passengers. Uber, of course, operates in more than one marketplace. Still, its ride-sharing business accounted for just under three-quarters of its total revenue in the second quarter.
Investors are buying Uber’s stock today for the future value that autonomous vehicles could provide to its platforms. But while Uber already calls itself a technology platform, it isn’t fully there yet. Drivers are nothing short of essential to ride-sharing today.
In a statement published last week, Uber’s chief legal officer Tony West said the fact that California’s new legal classification test sets a higher bar doesn’t mean Uber can’t pass it.
Investors are still betting a lot that he is right.