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Uber fights back against California law that could upend gig economy

Ride-hailing giant Uber, along with delivery company Postmates, sued California over a new law that aims to reclassify their drivers and delivery workers as employees instead of contractors. The law, which went into effect last week, could upend the business models of the companies that shaped the so-called “gig economy,” where contract workers use smartphone apps to accept odd jobs driving or delivering goods as frequently as they wish.

Any changes that add to Uber’s costs could worry investors already concerned about the company’s sizeable losses. As of Monday, Uber’s shares were down about 28% since the company’s May 2019 initial public offering, though they gained 6% in the first three trading days of 2020.

WHAT DOES THE NEW CALIFORNIA LAW REQUIRE OF UBER AND OTHER COMPANIES?

California’s new law, AB5, creates the nation’s strictest test for determining whether a worker is considered an employee. The law aims to give workers rights such as minimum wage, mileage reimbursement, paid sick leave, medical coverage and disability pay for on-the-job injuries. It was designed to improve working conditions at companies that rely on contract labour such as Uber and Postmates.

HOW MUCH COULD THE NEW LAW COST UBER?

Right now, Uber believes its drivers are classified correctly as independent contractors, so it hasn’t changed its business model to give drivers the benefits outlined above. If it was forced to classify its drivers as employees and provide the benefits outlined in the new law, that could end up costing Uber $500 million annually in the worst-case scenario, with an additional $40 million to $50 million in legal fees, said Dan Ives, managing director of equity research at Wedbush Securities.

WHAT MIGHT HAPPEN TO UBER’S BUSINESS IF THE NEW LAW STAYS IN EFFECT?

The new law would likely drive up costs, and prices, for the ride-hailing giant, although its competitors would face similar issues.

Ives calls AB5 a “nightmare scenario” for Uber which could throw a major wrench in its business model. Under the current model, the company has been losing about $1 billion or more per quarter.

It’s more likely, however, that Uber and other gig economy companies will reach a middle ground with California lawmakers, said Tom White, senior vice-president at D.A. Davidson, in a note to investors.

WHAT HAPPENS NEXT?

In the complaint, Uber and Postmates asked the court to order a preliminary injunction barring the state from enforcing the new law. The court could schedule a hearing on that request in coming weeks.

Uber also said it would aim to link the lawsuit to another legal challenge filed in December by groups representing freelance writers and photographers.

The lawsuit also could buy Uber time to hash out a deal with lawmakers and to sway public opinion about the potential impacts of enforcing the law, White said. And while enforcement of the new law is tied up in court, the gig economy companies are operating normally, he said.

IF THE LAWSUIT FAILS, WHAT ARE UBER’S OPTIONS?

Uber has vowed to spend $30 million to overturn the law at the California ballot box this year if it doesn’t get concessions from lawmakers. Lyft and DoorDash made similar pledges. Publicity from Uber’s lawsuit, which focuses on the potential negative impact to drivers and contends that the state unfairly exempted some industries but not others, could help build support for the ballot initiative.