A Gut Punch to Uber, Lyft, and the 'Gig Economy'
California shakes things up again... A gut punch to Uber, Lyft, and the 'gig economy'... The new 'ABC' test becomes a law... The problems are only beginning for these companies... How to make money from their inevitable tumble...
Are you an employee or an independent contractor?
In the "gig economy" – the growing portion of the workforce involved in temporary and flexible work – this question is more important and timely than ever...
The answer will have dramatic implications for some of the world's biggest tech stocks in the coming months.
In today's Digest, I (Bill McGilton) will explain why and how a recent court decision on this topic might change the gig economy forever...
I'll also detail why, for several reasons, popular ride-hailing giants Uber Technologies (UBER) and Lyft (LYFT) will feel the impact first... and which investments can potentially boost your portfolio as these stocks – and others like them – take an inevitable tumble.
But first, let's start in California...
Many "gig economy" companies – like Uber and Lyft – began in the state, making California ground zero for this discussion.
It started in 2004, when national transportation services company Dynamex converted its employees to independent contractors. It did so in order to save money, of course...
Classifying an employee as a contractor saves money because the employer doesn't have to provide expensive benefits like health insurance or paid time off. The employer also doesn't have to pay federal payroll taxes on what it pays its contractors (about 7.65% of salary costs in California).
A year later, about 230 Dynamex contractors filed a lawsuit against the company...
The contractors claimed they were performing the same tasks under the direction of Dynamex as when they were employees. So they argued that they should receive benefits.
At its core, whether a company considers a worker an employee or an independent contractor is all about control...
In general, if a company controls a worker and how he performs his job, he's an employee. On the flip side, if a company hires an independent contractor to produce a specific result, the company can't "control" his work.
Dynamex drivers performed pickups and deliveries with their personal vehicles. And officially, Dynamex maintained a policy of allowing the drivers to refuse work. However, the policy was rarely used...
Several drivers claimed they ran the risk of being "blacklisted" if they weren't available – or outright refused – to do an assignment.
The trial court in California initially sided with Dynamex. But because the law regarding employee status had been in flux, the state's appellate court reversed the decision.
In April 2018, the California Supreme Court upheld the appellate court ruling that Dynamex drivers were indeed employees...
More important, the California Supreme Court set a strict new "ABC" test to determine who qualifies as an independent contractor. All three of the following must apply...
A. The worker is free from the hirer's direction and control,
B. The work is outside the hirer's usual business, and
C. The worker is engaged in a customarily independent trade.
Passing part B is most difficult. Since driving is Dynamex's "usual business," its drivers couldn't qualify as independent contractors.
The Dynamex ruling was a game-changer... Essentially, it created a presumption that workers are employees in California – placing the burden of proof on the employer to establish workers as independent contractors.
Then, just last month, the California state legislature – both the Senate and the Assembly – passed the bill to codify the Dynamex "ABC" test. On September 18, California Governor Gavin Newsom signed it into law.
This new law will crush companies like Uber and Lyft...
They've relied on the "independent contractor" designation to grow their businesses.
As I wrote to my Stansberry's Big Trade subscribers after the law was signed last month...
The clock is now officially ticking for Uber and Lyft... Effective January 1, 2020, both companies will need to reclassify their drivers or they will face lawsuits in California compelling them to do so.
Currently, both companies classify their drivers as independent contractors.
A change in classification would mean significantly higher costs to pay for Social Security and Medicare taxes, workers' compensation, unemployment and disability insurance, family leave and sick pay, and complying with overtime and minimum wage laws.
Some experts estimate that the change would increase labor costs by as much as 30%. A reclassification to employee status also means that drivers can form labor unions.
There will be immediate effects...
As I said in the latest Stansberry's Big Trade issue, published last Wednesday...
According to Uber, more than 60,000 of its drivers were in some form of arbitration over their employment status just this year. Now that the law has passed, drivers located in California will be able to go to state agencies and argue their status...
Uber and Lyft plan to fight, of course. They will argue that they're not in the business of providing rides... that both drivers and riders are just customers and that their "usual business" is providing a tech platform for "digital marketplaces."
The argument will fail. Just because Uber and Lyft say they're tech companies, doesn't make them so. U.S. District Judge for the Northern District of California Edward Chen described the reasoning in a 2015 ruling against Uber...
Uber does not simply sell software; it sells rides. Uber is no more a "technology company" than Yellow Cab is a "technology company" because it uses CB radios to dispatch taxi cabs, John Deere is a "technology company" because it uses computers and robots to manufacture lawn mowers, or Domino Sugar is a "technology company" because it uses modern irrigation techniques to grow its sugar cane.
Indeed, very few (if any) firms are not technology companies if one focuses solely on how they create or distribute their products. If, however, the focus is on the substance of what the firm actually does (e.g., sells cab rides, lawn mowers, or sugar), it is clear that Uber is most certainly a transportation company, albeit a technologically sophisticated one.
Even Uber Chief Legal Officer Tony West acknowledges it's a stringent test. But Uber and Lyft won't die immediately... Litigation will buy the companies some time.
Ultimately, a judge will decide if Uber and Lyft are in compliance with the new law...
So far, all of Uber's and Lyft's proposed solutions have failed. The ride-hailing apps tried compromises based on various minimum wage formulas. And they tried to get an exemption. Neither worked.
Soon, attorneys from San Francisco and Los Angeles are going to be breathing down the necks of Uber and Lyft. State agencies will start enforcing driver claims.
Organized labor (such as the Teamsters and Service Employees International) are pushing drivers and the legislature to form unions. It's happening already.
The pressure is building...
Once the law kicks in and everyone is suing, Uber and Lyft will be far more willing to make costly concessions...
Their backup plan is to go directly to the voters. They're pushing for a state ballot initiative in November 2020 that recognizes their drivers as independent contractors.
So far, Uber, Lyft, and privately held food-delivery service DoorDash each plan to spend $30 million promoting this initiative, but it's not likely to work... After all, it would require overturning a pro-labor law in solidly blue California (in a presidential election year, no less).
It's not going to happen. But incredibly, the market appears to think Uber and Lyft will somehow wiggle their way out of it.
There's no way to wiggle out of this situation without expensive concessions.
And this is likely just the start of Uber and Lyft's problems...
Laws that start in California often make their way to the rest of the country.
Laws to require paid family leave and establish a $15 minimum wage got their start in California and later made their way to other jurisdictions.
And the employment status of ride-hailing drivers is already under similar scrutiny in several states – including Alaska, Massachusetts, New York, Oregon, and Washington.
Using Uber and Lyft may be more comfortable and convenient than using a taxi. But neither company has a sustainable business model now. Both are huge, cash-burning businesses with no path to profitability. Both companies stated in their initial public offering filings that they may never be profitable.
The reclassification of their drivers as employees will only make things worse.
California represents 17% of Uber's rides and 24% of Lyft's rides. International investment bank Barclays estimates the conversion will cost Uber $500 million and Lyft almost $300 million per year in California alone.
Many gullible investors think the problem will just 'sort itself out' as more people use these services...
It won't. Investors are greatly underestimating the risk.
In our Stansberry's Big Trade service, we focus on companies with serious flaws – like Uber and Lyft. Typically, these are companies with poor business prospects or heavy debt loads they can't afford.
We recommend taking a specific type of short position on these flawed companies. These trades provide leverage – meaning you can earn many times what you paid.
And we usually hold about a dozen positions for the purpose of protecting our overall portfolio. We recommend that these shorts make up no more than 5% of your overall portfolio. These positions provide portfolio insurance in case of a market sell-off.
And they provide the opportunity to profit when forces – like new laws in California – turn against companies like Uber and Lyft... that are already facing trouble on their balance sheets.
We've made a 45% profit on our position in Lyft in a little more than a month. Our position in Uber is already up 15% over the past week. The stocks are down roughly 24% and about 12%, respectively, over the same time periods.
If you're interested in getting my specific instructions for these trades – and more than a dozen others – with a subscription to Stansberry's Big Trade, I encourage you to click here to get started.
One last thing, especially if you're interested in learning more about short-selling...
Our annual Stansberry Conference in Las Vegas is coming up next week.
One of our presenters this year is noted short-seller Marc Cohodes. He has uncovered a number of huge Wall Street frauds – including Valeant Pharmaceuticals, which plunged nearly 90% in 2016.
If you're not able to make it to Vegas in person, you can still watch and listen to Marc and all of our other great presenters – like comedian and political commentator Dennis Miller, famed investor Jim Grant, and "Dr. Doom" economist Nouriel Roubini – with our online all-access pass.
Not only can you watch live from wherever you are, but you can re-watch your favorite presentations as many times as you want for up to 30 days after the event. Learn more here.
New 52-week highs (as of 10/1/19): none.
In today's mailbag, one subscriber weighs in on falling brokerage fees, while another shares some "boots on the ground" perspective on European markets. What are you seeing out there? Let us know at feedback@stansberryresearch.com.
"Good morning, just FYI, I know that you can't recommend brokerage companies, but I was just thinking that commissions are killing my small options trades... Then this morning, I received [an e-mail announcing $0 trading commissions at TD Ameritrade]. Isn't competition a wonderful thing? Regards." – Paid-up subscriber Jim S.
"I read comments here in Europe regarding the markets and the direction they are going to take nearly every day. Apparently in the US, sentiment is very bearish according to data that you regularly publish. This is completely the opposite in Europe. All the comments and analysis only point to higher prices and new records. Never do I read anything about a pending correction like among others [Ten Stock Trader editor] Greg Diamond is predicting. There is a very strong "buy the dip" mentality over here. Just for your information." – Paid-up subscriber Ludo G.
Regards,
Bill McGilton
Kiev, Ukraine
October 2, 2019