Shares of Uber Technologies (NYSE:UBER), Lyft (NASDAQ:LYFT) and DoorDash (NYSE:DASH) were all selling off today after Labor Secretary Marty Walsh told Reuters that as he saw it, most gig workers should be employees. The statement has obvious implications for these three companies, which rely on legions of independent contractors to run their ridesharing and delivery businesses, so it wasn't a surprise that all three stocks dived sharply on the news, which came out shortly after noon on Thursday.
As of 1:08 p.m. EDT, Lyft was down 9.7%; DoorDash shares were off 8.9%; and Uber had given up 5.5%, dropping more modestly because it has more exposure to international markets.
In an interview with Reuters, Walsh said, "We are looking at it, but in a lot of cases gig workers should be classified as employees ... in some cases they are treated respectfully, and in some cases they are not, and I think it has to be consistent across the board."
Walsh said his department plans to have discussions with companies that employ a large number of gig workers, such as Lyft, Uber, and DoorDash, which seems to indicate that an immediate policy change is unlikely. His statement also came in an interview rather than as a more formal announcement, which also would have indicated more immediate action is due.
This is not a new issue for these companies. They have consistently had to fight against regulatory threats in the U.S. and elsewhere over how drivers are classified and paid. These gig employers won a victory in California last November when voters passed a ballot measure that exempts them from a new state law classifying gig workers as employees rather than contractors.
Whether or not Lyft, Uber, and DoorDash can continue using contractors is a key question. They have millions of drivers working for them, and classifying them as employees would mean taking on extra costs like payroll taxes, unemployment insurance, and health insurance, among others.
Notably, all three have historically operated with steep losses, and have been taking significant steps to reach profitability. Both Uber and Lyft said they would reach profitability on an adjusted EBITDA basis by the end of the year, and Lyft just agreed to sell its autonomous-vehicle division to Toyota for $550 million, following a similar move last year by Uber, which has been unloading unprofitable divisions in its effort to reach profitability.
DoorDash, which went public last December, has not given a specific target date for reaching profitability, though the company has said it plans to do so by scaling up its business, adding new services, and expanding into international markets.
Being forced to reclassify their drivers as employees would be a serious setback in theise companies' efforts to turn profitable, so it's understandable that the stocks are diving today.
Uber and Lyft will both report earnings next week, and DoorDash's first-quarter update is due out the following week. Expect the companies to address the renewed concerns about driver classification, as the Reuters interview reminds investors that this issue won't go away, especially with a Democratic administration now in the White House.
Uber and Lyft will be able to point to the tailwinds from the economy reopening, which has propelled the stocks higher in recent months. Uber said that it posted record gross bookings for a single month in March thanks to strength in its food delivery business and a recovery in ridesharing.
DoorDash, on the other hand, is focused on food delivery and has seen tremendous growth during the pandemic with revenue up 226% in its most recent quarter to $970 million. But the company is likely to face questions over how it will perform once the pandemic is over.
No matter what happens in the earnings reports, the new threat at the federal level could put a ceiling on these high-growth stocks, at least for the near term.