If Lyft Can’t Keep Its Drivers As Independent Contractors, It May Never Be Profitable

By Johana Bhuiyan
Los Angeles Times

WWR Article Summary (tl;dr) As Johana Bhuiyan reports, it is in Lyft’s best interest to make sure drivers remain classified as independent contractors. However, the courts may have a different idea of how a worker at Lyft should be classified. THAT could be a big problem for the ridesharing service.

Los Angeles Times

Lyft’s entire business model is predicated on its relationship with its drivers. It hinges on recruiting them, keeping them happy, ensuring the company never has to provide them health insurance and other benefits, and eventually finding a way to replace some of them with self-driving cars so Lyft can keep a bigger chunk of the check after every ride.

Unfortunately for Lyft there is great uncertainty at each juncture of that driver relationship.

In filings last week initiating a planned initial public stock offering, Lyft, which lost $911.3 million on $2.2 billion in revenue in 2018, acknowledged it may never become profitable. That’s due in part to both long-standing limitations and new external threats that have left Lyft’s relationship with its drivers in flux.

“Lyft definitely faces more material risks than the average company going public,” said John Engle, president of private equity and venture capital firm Almington Capital.

A major point of uncertainty is whether Lyft will be able to maintain the flexible nature of its relationship with drivers. It’s in Lyft’s best interest to make sure drivers remain classified as independent contractors, not employees who qualify for benefits and other company-sponsored perks.

But that flexibility is at risk. An April California Supreme Court ruling, for instance, assumes any worker is an employee if his or her job is central to a company’s core business.

“We continue to maintain that drivers on our platform are independent contractors in such legal and administrative proceedings, but our arguments may ultimately be unsuccessful,” Lyft’s filing reads. “A determination in, or settlement of, any legal proceeding, whether we are party to such legal proceeding or not, that classifies a driver of a ridesharing platform as an employee, could harm our business, financial condition and results of operations.”

With Lyft and its larger competitor Uber vying for market share, competition over prices will remain fierce, Engle said. “Add the lack of pricing power to Lyft’s nearly $1-billion net loss in 2018, and I don’t see a profit inflection point on the cards near-term,” he said. “As for the independent contractor model, any tightening of the legal or regulatory framework could put the entire business model in jeopardy, and that affects Uber, too.”

In major markets such as New York City, regulators have imposed protections for drivers that cut at many of the cost-related benefits of using independent contractors.

Although Lyft has settled past lawsuits filed by drivers alleging they were misclassified as contractors, laws in the biggest ride-share market in the U.S. impose minimum wage requirements for drivers that are often reserved for employees.

Any threat to the ride-share business in New York City is critical for Lyft and Uber, which is also eyeing a 2019 initial public offering. But the bigger threat is the precedent these new rules may set for other jurisdictions.

“Our industry is relatively nascent and is rapidly evolving and increasingly regulated,” Lyft’s S-1 filing to the SEC reads. “We have been subject to intense regulatory pressure from state and municipal regulatory authorities across the United States and Canada.”

“Adverse changes in laws or regulations at all levels of government or bans on or material limitations to our offerings could adversely affect our business, financial condition and results of operations,” it continues.

Even if attempts to enforce laws that impose employee-like protections for drivers fail, Lyft still faces the increasingly difficult task of recruiting those drivers in the first place.

The pool of eligible drivers who want or need to drive for either Lyft or Uber and have not had some experience doing so already is dwindling in the U.S., where Lyft conducts the majority of its business. Up against Uber’s substantial war chest of funding and its desire to goose up its valuation ahead of its own IPO filing, Lyft will continue to have to spend greatly to attract and retain drivers both with bonuses and other perks.

That’s probably part of the reason the company is offering shares of its stock to drivers who have completed a hard-to-reach number of 10,000 rides.

“Our continued growth depends in part on our ability to cost-effectively attract and retain qualified drivers who satisfy our screening criteria and procedures and to increase utilization of our platform by existing drivers,” the company’s filing reads. “If we do not continue to provide drivers with flexibility on our platform, compelling opportunities to earn income and other incentive programs … that are comparable or superior to those of our competitors, we may fail to attract new drivers, retain current drivers or increase their utilization of our platform.”

Uber spent the better part of 2018 attempting to win back the trust of drivers by introducing a suite of new features and improvements including the long-sought-after in-app tipping option, which Lyft has had since its inception. Retention became a core focus as drivers fled the platform. As of February 2018, 30 percent of Uber drivers stopped driving for the company every quarter.

With Uber’s newfound focus on bettering its platform for drivers, Lyft may have a harder time positioning itself as the driver-friendly ride-hailing service.

The company contends its brand has always centered on the needs of drivers. But save for a few exceptions, most notably amid a call to boycott Uber in 2017 _ there’s little brand loyalty in the ride-hailing industry among passengers and drivers.

“Lyft definitely has a history of being the more driver-friendly service, but Uber has really caught up in that department,” said Harry Campbell, author of the Rideshare Guide, who also drives for both Uber and Lyft. “I think both companies are becoming more similar than ever these days, though, which is a good thing for drivers since they’re adding more features and benefits to try and retain drivers. I do still think Lyft cares more about their drivers, but it’s getting tougher and tougher to prove that.”

In the long term, however, the bet many ride-hail and transportation companies have made is that they won’t need to rely on drivers as heavily.

The development and progress of self-driving technology have been a beacon of hope for many companies that rely on drivers. As former Uber Chief Executive Travis Kalanick once said, “The magic of self-driving vehicles is that the reason Uber could be expensive is because you’re not just paying for the car, you’re paying for the other dude in the car.”

“If we are unable to efficiently develop our own autonomous vehicle technologies or develop partnerships with other companies to offer autonomous vehicle technologies on our platform in a timely manner, our business, financial condition and results of operations could be adversely affected,” the Lyft filing reads.

But the reality is neither company may ever fully get rid of drivers because of the slowing pace of progress of self-driving cars. The only company that is testing without a human safety driver in the front seat on public roads is Alphabet-owned Waymo, which has been working on its autonomous technology for more than a decade.

These days, Lyft and Uber say there will always be at least some human drivers on their networks to ensure demand is met if there aren’t enough autonomous vehicles available.

Lyft’s self-driving strategy, which is to partner with other companies building autonomous cars while also trying to develop its own technology, may prime the company to have such vehicles regardless of whether it is able to develop the technology on its own and at scale. But even in that case, the rollout of self-driving vehicles may be limited.

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