New York City just passed the first minimum wage for rideshare drivers like those at Uber and Lyft. Starting January 1, 2019, the companies have to pay a minimum of $ 26.51 gross or $17.22 after expenses.

Uber sent Inc a statement saying in part, "The TLC's implementation of the City Council's legislation to increase driver earnings will lead to higher than necessary fare increases for riders while missing an opportunity to deal with congestion in Manhattan's central business district." Lyft has not yet responded to a request for a statement.

This is terrible news for the gig-economy rideshare giants that have depended on keeping employees as strict contractors. The business model has seen no payroll taxes, overtime, or minimum wage for drivers, who pay all the expenses of running their cars. This will only add to the companies' expenses, but that's only the obvious problem. There are several others.

Hard-ish numbers

The theory all along has been that the companies will artificially hold down ride costs to attract market share, push other transportation choices out of the way, and then raise prices again when established beyond challenge. That's meant a lot of red ink.

In the first half of 2018, Lyft's revenue reportedly doubled year over year to $909 million. Losses were 41 cents per dollar, which was down from the 62 cents per dollar in the same period of 2017. That, however, assumes the reporting uses GAAP financial standards and that greater losses are not shifted away with creative accounting. Such has happened in the high-tech industry before and without actual audited figures, it's impossible to tell.

Separately, Uber had global revenue of $37 billion in 2017, up from $20 billion the previous year. (Lyft only operates in the U.S.) Last year it reportedly lost $4.3 billion. But looking at an examination by the Wall Street Journal, those numbers aren't all that insightful. After money to drivers, refunds, fees, and the like, the total was a little under $7.8 billion. Suddenly that loss is a whole lot bigger.

Need for speedy automation

The hope on the part of both companies and investors has been that revenue increases will outpace expense growth as Uber and Lyft keep trying to scale. Then higher fares should seal the profitability deal. Until then, the companies have seen billions in investment to keep them afloat.

Both companies would love to move to autonomous vehicles that replaced drivers with AI-powered automation. But even though they, as well as such companies as GM, Ford, and Google, want to embrace a driverless future, practically speaking, a real transition seems a distance off.

For now, they need drivers.

The problems drivers face

When working as self-employed contractors, rideshare drivers face a problem, as a number of studies have shown. Most of the drivers get squeezed. Costs are high, revenue out of their control, and the result can be a precarious living.

That is why drivers organized in New York City, one of what should be the more lucrative markets for driving, and pushed for higher personal revenue. And New York, a city in which the taxi owners, competitors to ridesharing, have a lot of political power, just set that minimum wage.

It's the second major defeat in the city for the companies. In August, the New York City Council voted to cap the number of for-hire vehicles on the roads.

Uber and Lyft will have to pay a greater share of proceeds in one of its highest revenue markets, which will drive losses higher. But beyond the simple economics are other issues.

Treated as an employer

It's been vital for both comapnies to continue treating drivers as contractors and not employees. But New York just shook the foundation some. Establishing a minimum wage means the city thinks of the drivers as employees, at least to some extent.

That doesn't necessarily establish a legal precedent for courts, but it starts moving in a direction that neither Lyft nor Uber can possibly afford. Courts do eventually follow practice and reality, and not only does company management know that, but investors do as well.

Other drivers will want the same

The problem with making enough money as a driver isn't something restricted to the five boroughs of New York City. It appears in other major markets, and probably minor ones.

Other drivers will take note and wonder why they shouldn't be able to get a similar deal, or at least something within reasonable hailing distance. This is likely going to mean discontent among many other drivers at the very least and something that could make recruitment and retention much harder. Plus, chances are that dealing with dissatisfaction  will start to demand management attention at a time where both companies want to file for an IPO.

They can be regulated

This is perhaps the scariest outcome. Uber, in particular, has been highly aggressive in trying to establish itself even when local officials weren't warm to its presence. Flouting regulations has been a hallmark of the ridesharing strategy. As they say in tech, ask for forgiveness, not permission.

New York's move is another example of Uber and Lyft being regulated, which starts to undermine their ability to operate freely elsewhere. Officials in other cities, especially bigger markets, are paying close attention.

Published on: Dec 4, 2018