Shares of Uber, Lyft drift lower after California judge says that contract drivers are employees

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Shares of Uber and Lyft dipped modestly after a California judge granted a preliminary injunction that TechCrunch reports could force the two American ride-hailing companies to reclassify drivers as employees in the state.

Uber’s stock is off about 1.3% following the cessation of normal trading hours after dipping around 2% in regular trading. Lyft’s stock is down a sharper 2.1%, though its shares rose during regular trading, making the impact of its after-hours declines smaller in aggregate.

As TechCrunch noted in its coverage of the ruling, the costs associated with classifying current drivers as employees and not independent contractors could prove material. While the decision might be meaningful, investors seemed unmoved. Reading the Wall Street tea leaves can be an exercise in futility, but in this case the months of chatter and legal wrangling over the central question of whether drivers should be employees may have desensitized investors to any particular news item.

Both companies provided statements after the news broke, each stating that they will appeal the ruling. That legal posture could also help assuage investor concerns about short-term economic impacts regarding the injunction, which is currently set to take effect in 10 days.

Here’s what Lyft had to say:

Drivers do not want to be employees, full stop. We’ll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with drivers.

And here are Uber notes:

The court’s ruling is stayed for a minimum of 10 days, and we plan to file an immediate emergency appeal on behalf of California drivers. The vast majority of drivers want to work independently, and we’ve already made significant changes to our app to ensure that remains the case under California law. When over 3 million Californians are without a job, our elected leaders should be focused on creating work, not trying to shut down an entire industry during an economic depression.

Uber CEO Dara Khosrowshahi published an op-ed in The New York Times today ahead of the ruling, arguing for a middle ground between the gig economy of today’s lack of worker support, and full employment.

To understand why shares of Uber and Lyft are not taking more fire from public investors in light of the news, TechCrunch turned to Uber’s most recent earnings filings. Lyft does not report Q2 earnings until this Wednesday, meaning we have less recent material from the company. Uber’s documents, however, are useful.

Filings

Uber reported earnings last week, showing stiff losses and a surging food-delivery business. The company’s ride-hailing operation was severely hampered by COVID-19 and its related impacts.

As part of its earnings cycle, Uber filed a 10-Q document. It included notes regarding the California legal situation from before the recent decision. The filing is dated August 7, 2020, or last Friday, making it about as fresh a comment from the company that we can expect regarding its pre-news perspective on the matter.

Here’s the first pertinent portion of its SEC filing, with our emphasis to help you parse it:

The Company has existing litigation, including class actions, PAGA lawsuits, arbitration claims, and governmental administrative and audit proceedings, asserting claims by or on behalf of Drivers that Drivers are misclassified as independent contractors. In connection with the enactment of California State Assembly Bill 5 (“AB5”), the Company has received and expects to continue to receive – in California and in other jurisdictions – an increased number of misclassification claims. With respect to the Company’s outstanding legal and regulatory matters, based on its current knowledge, the Company believes that the ultimate amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows. The outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. If one or more of these matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s results of operations, financial condition or cash flows could be materially adversely affected.

A bit further down in the filing, Uber said the following, regarding its chances of success:

On August 6, 2020, following a hearing on the matter, the San Francisco Superior Court informed the parties that the Court would take the motions under submission and publish its order in the coming days.

The Company intends to vigorously defend itself with regard to these actions. The Company’s chances of success on the merits are still uncertain and any reasonably possible loss or range of loss cannot be estimated.

Welcome to the coming days.

Using their share price movement as a barometer, the immediate view from investors appears to be that the possible damage to Uber and Lyft from the decision could prove modest despite.

Uber and Lyft had made profit promises to their shareholders before COVID-19 arose, harming their business results. The California decision could add another layer of difficulty for each as they work to come out of the COVID era solvent, and once again on a path to adjusted profitability.

Source: TechCrunch

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