Can Uber and Lyft survive if California's worker protections go nationwide?

The passage of California’s Assembly Bill 5 (AB5), the landmark state law that reclassifies contract rideshare drivers as employees, marked a historic win for gig economy drivers demanding better working conditions. Now Los Angeles is taking the first step toward securing a $30 minimum wage for Uber, Lyft, and other rideshare drivers in the city.

On Tuesday, the Los Angeles City Council voted to proceed with an independent study on the average wages and business expenses of the city’s rideshare drivers, and review policies around the country. The motion also asked the city attorney to draft an ordinance that would set the minimum wage to $30, suggesting that drivers will need an additional $15 per hour to pay for business expenses like gas. Currently, the city’s minimum wage for most businesses is $14.25, but will be raised to $15 citywide by 2021. In the state of California, the minimum wage is $12 an hour, and will reach $15 by January 2023.

California's AB5, which goes into effect in January, will force both Uber and Lyft to make their drivers W-2 employees, thus requiring the companies to pay its driver-employees a standard slate of benefits, as well as guarantee that employees make at least the California minimum wage. The proposed ordinance in Los Angeles would double that. As Salon has previously reported, precedents set in California could catch on across the country.

Can Uber and Lyft survive a nationwide change in status and wages for their drivers? According to Saba Waheed, a research director at the UCLA Labor Center, it's hard to say definitively one way or another.

“What I can say is that the way the business model is currently structured is that it is very much based on drivers being independent contractors and not treating them as employees,” Waheed told Salon. “This business model was built on pretty exploitative conditions for drivers.”

Waheed added that both companies subsidize rides to make them cheaper for consumers. It's part of the business model. This suggests fares were bound to increase at some point regardless of employee status. “The cheap fares aren’t because they are cheap rides, it’s because drivers aren’t paid well and they are subsidizing part of that fare,” Waheed said.

An overhaul of the rideshare business may be coming anyway. This week, The Atlantic published a story titled “The Millennial Urban Lifestyle Is About to Get More Expensive,” about how Silicon Valley managed to explode with “lifestyle adjustment” companies — like Uber, or "Uber for X"-style services — but despite hefty capital raised, these companies remain unprofitable. “The theme of consumer tech has shifted from magic to margins,’ Derek Thompson wrote. “Venture capitalists and start-up founders alike have re-embraced an old mantra: Profits matter. And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.”

But Uber and Lyft have used those (possibly inevitable) rising costs to rally consumers against bills like AB5. Both Uber and Lyft have said in statements to prospective investors that making drivers employees could significantly alter their financial outlook. In an email to drivers in September, Lyft said that “as a result of AB5,” drivers may be required to drive “specific shifts, stick to specific areas, and drive for only a single platform.”

As experts have noted in the past, Uber and Lyft business models banked on a future of degraded public services in which public transportation in densely populated cities crashes and rideshare apps and automation become the norm. Their strategy from the beginning was to capture the market, then raise prices.

“Right now they are both in the mode of ‘let’s capture market share,’ and the bottom line is less important than capturing revenue and market-share growth, but once you become a public company and you have to release your earnings every quarter, people will be very closely monitoring your earnings,” Reena Aggarwal, a professor of finance and director of the Center for Financial Markets and Policy at Georgetown’s McDonough School of Business told MarketWatch in May, regarding to the companies initial public offerings. “There is going to be a lot of focus on that. They will have to raise prices, because of the pressures.”

The collapse of public transportation is key to their success. In a document filed with the Securities and Exchange Commission, Uber said that part of its growth strategy was not just to get people out of private cars but to get them off public transportation.

“We believe we can continue to grow the number of trips taken with our Ridesharing products and replace personal vehicle ownership and usage and public transportation one use case at a time, including through continued investment in our affordable Ridesharing options, such as Uber Bus and Express POOL,” the document stated.

Now, as the costs of rideshare rides are about to increase — and fewer people are taking public transportation, thus impacting funding — people in densely populated cities without cars might find themselves with limited options, hit with higher rideshare costs at the same time public transit options are declining.

“It’s not just going to be about Uber and Lyft rethinking business models, it is going to be about cities thinking about their mobility plans and how much they want to rely on Uber and Lyft,” Waheed told Salon. “They are affecting and undermining public transportation systems and it causes a cyclical thing. Ridership resources go into maintaining these systems.”

It's a sobering time to consider what relying more on rideshares will do to urban dwellers. This week Uber let go of 350 actual employees — its third round of layoffs in the last 10 weeks. Overhead cuts like labor are an obvious way to push a business toward profitability, and can also signal trouble ahead. (Meanwhile, Uber has also reportedly spent $30 million toward pushing an initiative for the California 2020 ballot to exempt them from AB5.) It is worth watching to see if, assuming price increases do happen, that will be enough to turn things around.

Regardless of how Uber and Lyft weather these California changes, Waheed said she doesn’t see rideshare companies disappearing in the near future.

“If it’s not them, someone will pick it up and figure out how to do it,” Waheed said. "It doesn’t need to go away, but it doesn’t need to have the elements it has right now. It can’t have the working conditions it has for drivers, because clearly drivers are going through a revolving door.”

Waheed added that she believes the moment in time we are in right now is a “a symptom of tech having free rein."

“That was a way to open up ideas and bring new ideas into the city, but at the end of the day they can’t stay that way, they have to think about the systems and care for the people driving, and the people who are riding. And that’s the moment we are at right now,” Waheed said.