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Landmark California Bill Poses New Threat to Rideshare Companies

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California legislators passed a landmark bill on Tuesday that threatens to reshape rideshare companies’ business models. Uber (UBER - Free Report) and Lyft (LYFT - Free Report) have been actively combating this legislation that would force the companies to reclassify their drivers as employees and not independent contractors. The legislation, known as Assembly Bill 5 (AB5), passed 29 to 11 in the State Senate and now moves on to the State Assembly, where if it passes, it will then land on California Governor Gavin Newsom’s desk.

Governor Newsom recently expressed his support for the bill, which would go into effect January 1st of next year, saying it would provide critical labor protections for workers. Rideshare companies spent much of the year pushing lawmakers to alter the bill or exempt them from it, but their efforts fell short to the opposition from labor unions and a large Democratic support of AB5.

Implications

Uber and Lyft argued that the bill would raise new costs and logistical challenges that would be bad for them and their employees who enjoy their job flexibility. Lyft spokesperson Adrian Durbin commented, “Today, our state’s political leadership missed an opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits.”

Uber said in a blog post that the bill would lead to downsizing, as it would be not be able to support the current number of drivers they have hired. Uber also said that its main goal was to propose an idea that would preserve its flexibility and reliability while improving the quality and security of independent work. If AB5 passes, Uber would most likely pass the costs onto consumers, resulting in fare hikes. The bill is also likely going to bring the gig economy issue to national attention, which could result in additional states in the country launching their own legislations.

Food delivery companies would also be impacted by the potential legislation since they also fall under the gig economy umbrella. Some companies would be affected more than others; DoorDash and Postmates have more presence in California than Grubhub (GRUB - Free Report) , for example. Grubhub reportedly only delivers 35% of its orders overall, making them less susceptible to unfavorable legislations. Deustche Bank (DB - Free Report) estimates that California accounts for 20% of Lyft’s bookings and Cowen (COWN - Free Report) analysts believe that California will comprise roughly 6% of Uber’s bookings.

Takeaway

This bill does not bode well for the gig economy, and may likely motivate other states to follow suit. Rideshare companies will have to pass on the extra costs brought on by AB5 to consumers, which can hurt their top-line. Uber and Lyft are already losing billions competing each other for market share and now have to contend with legislators. Both companies have not been able to gain momentum since their IPO; Uber is down 17.7% since its May public offering and Lyft is down 39.5%.

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