California's State Assembly passed a bill on Wednesday known as "Assembly Bill 5," which would compel the companies to treat contractors as full-time employees, which would in turn require them to pay some form of minimum wage and benefits. AB5, as it's known, had been approved by the State Senate on Tuesday.
But a report in the The Wall Street Journal on Wednesday morning cited remarks by California Governor Gavin Newsom saying he is personally involved in what "remain ongoing negotiations" with both companies, and that California will "remain at the bargaining table" regardless of what happens with AB5. On Wednesday afternoon, Uber indicated that it would not automatically reclassify its drivers as employees when the bill is scheduled to go into effect in January of 2020 since it doesn't believe the measure should apply to it.
On Wednesday, Uber shares rose 1.46% to $34, while Lyft was up 2.4% to $46.53. Uber had already gained sharply in Tuesday's trading as it announced cuts of 435 jobs in its engineering and product development departments. That move was presented as a way for the company to become more nimble, according to prepared remarks by Uber management.
Observers had expected the California bill to pass, and Wednesday's stock moves suggests many believe a negotiation will avoid the most severe consequences for the companies.
"I think the market is trying to, sort of, handicap the chances that some middle ground gets hashed out," said Tom White, who follows both Uber and Lyft for DA Davidson & Co.
Such a middle ground "would be less impactful for the ride sharing companies," he suggested, and "would enable lawmakers to go back to their constituents and claim some sort of victory, and preserve Gavin Newsom's role as a governor of a state that is friendly to technology and to fostering innovation."
White cited data from Lyft suggesting its contractors truly are part-time workers. Lyft data, for example, shows that in California, 89% of their drivers for the company drive less than 20 hours per week. Nationally, the company claims, 75% of its drivers are doing less than 10 hours per week of work.
"Yes, there are some who drive a lot and deserve benefits, and they'll be happy to be full-time employees, and show up where Uber and Lyft tell them, but presumably there's a lot who still want that flexibility," says White, who has a Buy rating and a $74 price target on Lyft, and a Neutral rating and a $44 price target on Uber.
Even with a compromise, there may be an impact to the economics of the ridesharing business, but it may not be as bad as expected. A higher wage for drivers -- say, a guaranteed minimum wage in California of $21 per hour, which has been discussed -- would most likely get passed along to riders in the form of higher fares, observers said.
While that might dent demand, some believe the reduction in demand is far less important than the potential for demand for Uber and Lyft's services to increase across many markets over many years.
"The most important thing is liquidity, bringing new drivers into the system, which allows you to reduce wait time and increase occupancy, which improves quality and cost at the same time -- that is what drives growth" said Pierre Ferragu, who follows Uber for New Street Research and rates its shares a Buy. "Even if they have to pass along higher costs for drivers' welfare, you still have a trajectory that dictates more people will use the service over many years."
"That game of increasing returns is what drives the success of the service," Ferragu added. "If unit costs increase with wages or gasoline costs, for instance, it can slow that dynamic, but it can't kill it."
Some California legislators may see room for negotiation, albeit without the same emphatic attitude as Governor Newsom.
"As long as we remain true to the most basic protections and rights of workers yes I'm sure there is room to discuss," said state Senator Marîa Elena Durazo in an interview with TheStreet. "But I don't know how much room there is." It's not clear, she indicated, that compromise can necessarily be reached by talking with the companies themselves.
"We want companies to be prosperous, but it should not mean the taxpayers have to subsidize these companies," said Durazo. "When a worker gets sick and they don't have medical insurance, the taxpayers have to pay for that."
Tiernan Ray neither trades nor owns shares of any companies mentioned in this article.