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A California Bill Could Destroy Uber’s Unsustainable Business Model

Last week, the California Senate’s Labor, Public Employment and Retirement Committee held a hearing and passed Assembly Bill 5 (AB5), which promises to make it harder for companies to claim workers are independent contractors and increase the operating expenses of Uber, Lyft, and other on-demand companies that already find themselves unable to turn a profit. Motherboard reports: Written by Assemblywoman Lorena Gonzelez (D-San Diego), AB5 codifies the California Supreme Court’s unanimous May 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles where an “ABC test” was introduced to determine whether a worker was an employee or an independent contractor. Individuals with sufficient control over how and when they did their work are independent contractors, while workers without much control are employees. While AB5 easily passed in the Assembly this May, 53-11, it has a long and ugly fight ahead of as it must pass multiple votes in the Senate then be signed into law by Governor Gavin Newsom. Each step of the way is an opportunity for companies like Uber and Lyft to intervene and extract concessions.

Uber has never made a profit and has actually lost over $14 billion in the last four years alone. In the prospectus, Uber insists that these five major metropolitan markets are essential to its path to profitability. In reality, what Uber actually relies on is the $20 billion in funding raised over the past decade and the $8 billion in new investments after going public in May. This investor welfare covers the cost of low prices that render each rideshare trip unprofitable, of driver incentives to combat the high turnover rate of drivers, and of promotions used to drive up demand. Equity research analysts at Barclays project Uber is on track to lose $3.9 billion in 2019 and if AB5 were passed, it would cost the company upwards of an additional $500 million. A drop in the bucket. But if AB5 were to become law and other states follow California’s example and pass similar laws, it could constrict these companies’ already narrow paths to profitability.


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