Uber and Lyft drivers are planning to strike this week, and it highlights the challenge the 2 ride-hailing giants face as public companies (UBER, LYFT)

Max Whittaker/Reuters

Drivers for Uber, Lyft and other companies are planning a nationwide strike on Wednesday. Many drivers, classified as contractors and not employees, are unhappy with declining pay.
"Wall Street investors are telling Uber and Lyft to cut down on driver income, stop incentives, and go faster to Driverless Cars," Bhairavi Desai, executive director of the New York Taxi Workers Alliance, said.
As Uber and Lyft fight for market share in the United States, a calculation known as a take rate has become front and center. Both companies have to try and please drivers, riders, and investors, putting the companies in a difficult position.
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Drivers for ride-hailing companies including Uber, Lyft and others are planning coordinated strikes in at least 10 cities this week to call attention to low pay and other issues, according to the 10 groups organizing the demonstrations.

It’s far from the first time drivers have raised issue with how how little they are paid, or their status as independent contractors as opposed to full-fledged employees with benefits like paid time off or sick leave.

However, this strike seems to be attracting more attention than others thanks to its proximity to Lyft’s first ever earnings report as a publicly traded company on Tuesday, and before Uber’s debut on the New York Stock exchange on Friday.

It all comes down to take rates

Paying drivers is one of the biggest expenses for ride-hailing companies. The fraction of total fares that Uber or Lyft skims from trips (and deliveries, in the case of Uber), is known as the take rate.

Setting these rates is a delicate dance as the two companies — basically the only competitors in most of the country — fight to win over both drivers and riders. The higher the take rate, the more money Uber or Lyft can add to their coffers, and the better the numbers look to Wall Street investors.

The lower the rate, the more more money is kept by drivers.

"We note that drivers are hired as independent contractors vs. full employees, meaning they are responsible for their own vehicle expenses (maintenance, gas, insurance, etc.) and it is difficult for them to increase the amount of earnings per hour beyond a certain level given the current dynamics of the industry with take rates the hot button issue," Daniel Ives, an analyst at Wedbush Securities, said in a note to clients on Monday.

Uber’s take rate increased to 21.7% in 2018 from 20.5% the prior year, the company disclosed in IPO filings. Lyft’s, by comparison, was 26% in 2018 (though the two companies calculate this number slightly differently, with Uber including tolls and surcharges in the calculation.)

Ives says he’s expecting a "minor increase in 2019 to 22.3% but overall expect limited upside to take rates," at Uber. Any increase in that take rate, while beneficial for Uber’s bottom line, could be risky, Ives said.

"We do see added risk from Uber aiming to take greater share of the fare from drivers and expect that the more Uber pushes here, the more drivers will fight back and protest, increasing the likelihood of regulations (particularly at the state level in the U.S. and in Europe) of minimum wage guarantees," he writes.

"Drivers classified as employees would be a challenge to Uber’s operations in those markets where they are classified as such," Ives continued.

Both Uber and Lyft have fought hard for years to ensure that drivers remain classified as contractors and not employees. In their prospectus filings for IPOs, both companies mentioned the employment status of drivers as a risk factor. Classifying workers as contractors can cut costs for platforms by 20 to 30%, industry experts estimate, hence why companies have fought so hard to keep the status unchanged.

"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 said in its S-1. "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."

Uber’s warning used much of the same language:

"If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees, we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes, and penalties," the company’s S-1 reads.

Self-driving cars could theoretically mitigate some of the money that Uber must pay to drivers, the company also said in its IPO filings. However, researching autonomy is an expensive bet, with Uber’s advanced technologies group comprising more than 1,000 employees at three offices in Pittsburgh, San Francisco, and Toronto.

So what do striking drivers want?

According to the groups organizing Wednesday’s strikes, drivers are demanding job security, livable incomes, and more regulations to help drivers stay afloat.

"Wall Street investors are telling Uber and Lyft to cut down on driver income, stop incentives, and go faster to Driverless Cars," Bhairavi Desai, executive director of the New York Taxi Workers Alliance, said in a press release. "Uber and Lyft wrote in their S1 filings that they think they pay drivers too much already. With the IPO, Uber’s corporate owners are set to make billions, all while drivers are left in poverty and go bankrupt. That’s why NYTWA members are joining the international strike to stand up to Uber greed."

Notably, New York is the nation’s largest ride-hailing market, and also one of the first cities worldwide to establish a minimum wage law for app-based drivers. Lyft and Juno sued the city to overturn the law, arguing that a key calculation for how drivers are paid unfairly favors Uber thanks to its larger size. A state judge last week rejected Lyft’s arguments and said that the law can stay in place as written.

Ahead of the demonstrations, both companies acknowledged that drivers are the most important element of their businesses. Here’s Uber’s statement:

"Drivers are at the heart of our service─we can’t succeed without them─and thousands of people come into work at Uber every day focused on how to make their experience better, on and off the road. Whether it’s more consistent earnings, stronger insurance protections or fully-funded four-year degrees for drivers or their families, we’ll continue working to improve the experience for and with drivers."

And Lyft:

"Lyft drivers’ hourly earnings have increased over the last two years, and they have earned more than $10B on the Lyft platform. Over 75 percent drive less than 10 hours a week to supplement their existing jobs. On average, Lyft drivers earn over $20 per hour. We know that access to flexible, extra income makes a big difference for millions of people, and we’re constantly working to improve how we can best serve our driver community."

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Source: Business Insider – grapier@businessinsider.com (Graham Rapier)