Californians vote on the future of Uber

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EVEN A HALF-EATEN apple shoved in Dara Khosrowshahi’s face by his young son during a Zoom interview does not ruffle Uber’s boss. “Not now, sweetheart,” was his calm response. Mr Khosrowshahi needs all the unflappability he can muster. Besides picking their president, on November 3rd Californians will vote on a ballot initiative, Proposition 22, that will shape the future of the ride-hailing firm and other gig-economy platforms. The companies have spent nearly $200m promoting the measure, in an effort to preserve their business model.

At issue is whether freelance drivers, couriers and other app-based workers should be treated as employees, entitled to benefits such as unemployment insurance and sick leave. “Prop 22” is a stab at balancing worker protections with the flexibility that lets people work when they want while ensuring that customers never have to wait long for a ride or a meal delivery.

Founded 11 years ago, Uber created the template for the gig economy. Its software matches demand and supply in real time. At first riders and drivers benefited, as Uber and Lyft subsidised rides in a battle for market share. In the past few years the duo began to cut costs, egged on since they went public last year by investors. Uber’s “take rate”, the share of fares it keeps for itself, now averages 26%, up from 20% in 2017, according to New Street, a research firm. Drivers get correspondingly less.

How much they earn per hour is a matter of hot debate. Whatever the pay, though, it comes with no benefits. This may not matter to those who drive to make cash on the side, in addition to other jobs. Uber claims the bulk of its drivers are such part-timers. Critics allege that most rides are provided by full-time drivers. Sharing these concerns, a year ago California passed a law, called AB5, which among other things redefined independent contractors as those who are free from the control and direction of the hirer. Gig firms argue they meet AB5’s criteria. On October 22nd an appeals court ruled they probably do not, pending a full trial next year.

Complying with AB5 would turn Uber from an online marketplace to something like a conventional black-car service, Mr Khosrowshahi says. It would, he adds, have to fire 76% of its 200,000-odd drivers in California. The remainder would work mostly at peak times—and no longer be paid “exactly in proportion to the value that they bring to the system”, he argues, which is “one of the underestimated features of the gig economy”. And, Uber warns, fares would rise by between 25% and 111%.

Nonsense, say Uber’s opponents. Veena Dubal of the University of California’s Hastings College of the Law reckons AB5 would raise cost per driver by a third. But, she says, it would preserve flexibility and protect vulnerable workers. As for fare increases, findings in New York, where ride-hailing firms must pay the city’s minimum wage and respect other rules, suggest that these could be lower than Uber’s estimate.

Enter Prop 22. It would scrap AB5’s narrow definition of independent contractors, while providing such workers with some benefits, including net earnings of at least 120% of the hourly minimum wage and health-care stipends. It could pave the way for portable benefits, which Mr Khosrowshahi has called a “third way” between the status quo and AB5, and which prominent economists, including the late Alan Krueger, have advocated (though it has no provision for collective bargaining, which Krueger also backed). Benefits would be based on “engaged time”; waiting between rides does not count. To qualify for a full health-care stipend, for example, drivers must be “engaged” for 25 hours a week. And any amendments to the proposition would require a seven-eighths supermajority in California’s legislature.

Critics call Prop 22 lopsided. Californians may still back it. They have been bombarded with ads and notifications in their apps warning that a no-vote would doom gig-working. Prop 22 has won the support of influential lobby groups such as Mothers Against Drunk Driving. Polls show the measure winning. If it does, this may bolster Uber’s case in other places, such as Switzerland, where authorities want to classify drivers as employees.

Even if Prop 22 wins, Uber’s business model needs work. It still loses money and investors are getting impatient. Its share price is down by a fifth since it listed. Revenue from rides fell by 75% in the second quarter, year on year, as covid-19 lockdowns sapped demand. Mr Khosrowshahi wants to switch from moving passengers to ferrying everything in cities. Quarterly revenues from its meal-delivery arm doubled as restaurant-goers self-isolated, and now account for nearly 70% of the total. “Just like Facebook built the social graph of connections between friends, we can build the local graph of the connections between people and things,” Mr Khosrowshahi says. Until self-driving cars replace human drivers—don’t hold your breath—that business may not be viable in an AB5 world.

Clarification (October 28th 2020): An earlier version of this story implied that a court had ruled that gig companies misclassify their workers. In fact it upheld a preliminary ruling that they probably do, pending a full trial. Dara Khosrowshahi, Uber’s boss, also said that California’s labour laws would turn Uber from a digital marketplace to a conventional black-car company, not a taxi company as we suggested.

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This article appeared in the Business section of the print edition under the headline “Catch 22”

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