The gig economy is currently under attack in California, and part of former Vice President Joe Biden's platform involves widening the battleground to the other 49 states. Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have a lot to ponder between now and Nov. 3 -- as do its shareholders.
The two leading ride-hailing services aren't taking the fight in California lightly. They're backing Proposition 22, a ballot measure that would exempt ride-hailing and food delivery businesses from the state's Assembly Bill 5 (AB5), which requires companies with independent contractors to be treated as employees with all of the associated benefits. Uber and Lyft naturally want Proposition 22 to succeed when it comes up for a vote in two weeks. Together they've bankrolled more than half of the donations pushing for the ballot measure. Other food delivery services like DoorDash and supermarket sweeper Instacart have also stepped up as major donors.
The battle in California is important for Uber and Lyft in the immediate term. They're more fearful of the known -- what will happen to their operations in California under AB5 -- than the unknown of a Biden presidency. Let's take a closer look at what Biden's platform has to say about the treatment of independent contractors and what it could mean for Uber and Lyft.
Looking under the hood
There's a lot riding on AB5. Uber has argued that just 9% of its California drivers are on the app for the 40 hours per week required to be considered full time. It has also said that most of its contractors prefer to dictate when they make themselves available to take passengers or restaurant orders. Full-time Uber drivers account for just a quarter of all of the rides on the platform.
Speaking at The Wall Street Journal's annual Tech Live conference, Uber CEO Dara Khosrowshahi said that the company will try to operate in California even if Proposition 22 fails, reversing earlier comments this summer that it would bow out of the state along with Lyft.
But sticking around will come at a cost. Fares are expected to rise 20% to 40% in Los Angeles and San Francisco, and roughly double in smaller markets. Rising costs might eat at passenger demand. Meanwhile, many current Uber and Lyft drivers won't enjoy the trade-off of scheduling flexibility for benefits. Car-sharing as we know it could be toast in the country's most populous state if Proposition 22 fails.
A Biden presidency wouldn't be as immediately disastrous to Uber and Lyft, but it pays to read up on his platform's relevant talking points: "Employer misclassification of 'gig economy' workers as independent contractors deprives these workers of legally mandated benefits and protections."
Biden backs California's three-prong test to distinguish employees from independent contractors, and he'll work with Congress to establish a similar federal standard for all labor, employment, and tax laws. This is the kind of mandate that should send shivers down the spines of Uber and Lyft shareholders.
But there are two sides to every story.
First, there's a lot on Biden's agenda. Busting up Uber, Lyft, DoorDash, and Instacart isn't likely to be a priority. Campaign promises don't always yield actual results.
Second, there will also be some tailwinds to help gig economy stocks if some Biden initiatives are implemented. Keeping taxes in check for anyone earning less than $400,000 a year, increasing infrastructure spending, and boosting the federal minimum wage to $15 an hour will widen the pool of potential customers for these services. A larger safety net might also give car owners who enjoy driving more reasons to flash the Uber and Lyft beacons on the side.
The current gig economy model isn't likely to work if California's AB5 goes national. However, investors in ride-hailing companies shouldn't be too nervous about the presidential election outcome.
With Uber and Lyft still trading below their 2018 initial public offering prices, it's not as if staying the course for the next four years will necessarily be any better. Uber and Lyft can survive -- and potentially thrive -- under a Biden presidency, as long as the model still makes financial sense for the app operators.