What a New California Law About Independent Contractors Would M…

Re-classifying drivers as employees instead of independent contractors could cause a hit to these companies’ already-suffering stock prices.

Ride-sharing companies Uber (UBER 2.60%) and Lyft (LYFT 3.60%) have experienced significant setbacks since their initial IPOs in the spring, but new local laws could have both companies -- and others operating in the gig economy -- scrambling to react.

New York City, the companies' most lucrative market, recently enacted new laws to limit the number of drivers who work for the ride-share companies, establish a minimum wage for the workers, and limit the amount of time they spend on the road.

On the West coast, the California state Senate will soon vote on Assembly Bill 5, a measure that would limit the companies' ability to continue classifying their drivers as independent contractors. If the bill passes, Uber and Lyft will have to designate all drivers as employees, which would require them to comply with minimum wage laws and pay employer-based taxes, among other measures.

Image Source: Uber

Earlier in 2019, in its S-filing with the U.S. Securities and Exchange Commission, Uber said, "Our business would be adversely affected if drivers were classified as employees instead of independent contractors."

If the California law passes, more states and cities around the country could follow its lead by taking a hard look at how these workers are classified.

Investors' hopes were high for both Uber and Lyft before they went public. Following an aggressive fund-raising period, venture capitalists at one time valued Uber at almost $72 billion.

Uber's initial stock price was somewhat of a disappointment, opening at $42. By early June, the stock had reached $45, the first time it had risen above the IPO price. It peaked at $46.38 on June 28, but the stock has been in a freefall since.

Uber's stock price opened September 18 at $34.71, marking a precipitous 17% drop from the IPO price and 25% down from its peak.

The story has been much the same for Lyft. Its stock opened at $72 per share on March 29, but hasn't been in the $70-range since early April. Lyft opened at $47.43 on September 18, marking a 34% decline since its IPO.

On Tuesday, drivers for Uber and Lyft staged a protest in Manhattan, blocking traffic in a show of solidarity. Their chief complaints: Low pay and poor working conditions. New York City's new law and California's proposal are both, in slightly different ways, aiming to answer the workers' pleas.

As independent contractors in California, ride-share drivers are not eligible for benefits, don't have to be paid minimum wage or overtime, don't have to be provided specific meal times or breaks, and aren't eligible for reimbursement of business expenses. The workers are, in essence, treated as small business owners.

What classifying drivers as independent contractors does for Uber and Lyft is allows them to not have to comply with these regulations, as well as shields them from having to pay payroll taxes. Combined, the four payroll taxes of Social Security, Medicare, FUTA, and CA SUTA can add up quick -- approximately $5,500 for a worker with a $65,000 salary.

These significant costs would be a huge burden to the bottom line, Uber and Lyft officials have said. In response, the companies have joined together to fight for their right to keep workers classified as independent contractors.

In late August, the two companies pledged $60 million as part of a ballot initiative for California's 2020 election. If passed, the ballot measure would keep workers classified as independent contractors but would provide worker protections such as paid sick leave and paid family leave for certain workers, protection for worker injury, and a minimum earning of $21 for every booked hour.

The two companies are hoping that by getting ahead of the issue, they could be seen as partners in the fight for increased worker protections and not the enemies.

Investor confidence has been low in both Uber and Lyft, reflected in their dropping stock prices. In addition to the potential effects of changing state regulations, Wall Street has concerns about riders shopping around for better prices.

Estimates for Uber's 2019 P/E ratio are -4.9, while estimates for 2020 see the ratio at -11.32. Lyft, meanwhile, has estimated P/E ratios of -4.22 and -8.63 for 2019 and 2020, respectively.

Still, with stock prices for both companies hitting lows in the last few weeks, there may come a time in the near future where investors see an opportunity to pounce on what once was two promising technology/transportation companies.