Uber (UBER) Stock Down 10.42% in Tuesday's Trading: Here's Why
Shares of Uber Technologies UBER plunged 10.42% on Oct 11, closing the day’s trading session at 24.66 per share. The steep decline was due to the new labor rules proposed by the Biden administration on gig workers.
Sneak a Peek Into the New Proposal
On Oct 11, 2022, the U.S. Department of Labor announced the publication of a proposed rule to renew the department’s guideline on how to ascertain an employee or an independent contractor under the Fair Labor Standards Act (FLSA). On being effective, the proposal will replace the current rule that gives greater weightage to the extent of control that workers can exercise over their duties and earning opportunities.
The current proposal will consider multiple factors while determining an employee’s status. While deciding whether a person is genuinely in business for themselves,it is important to analyze how “economically dependent” he is on a company. Other factors include the profit or loss opportunity. Per the department, its proposed rule lowers the risk of misclassifying employees as independent contractors.
Why Uber is Feeling the Pinch
The proposal is likely to take a lot of time before being finalized. There will be a 45-day public comment period on the proposal, ending at 11.59 P.M. ET, come Nov 28, 2022. However, shares of Uber tanked following the news that the Labor Department will revamp rules on the classification of workers as employees or independent contractors.
Currently, Uber saves a significant amount of labor costs by classifying its workers as independent contractors. Reclassifying the hands as employees from independent contractors will invariably raise labor costs.
The share price decline was not limited to Uber. Its rival in the ride-hailing space Lyft LYFT fared even worse, shedding 12% of its value on Oct 11. Lyft, like Uber, saves labor costs by employing independent contractors. Therefore, the proposal, if finalized, may bring more gig workers to its payrolls and increase labor costs.
In fact, Lyft is already suffering inflation-related woes big time. Consequently, LYFT decided to stop hiring employees through year-end. The current update on the likely reclassification of its workers as employees from independent contractors bears further bad news as labor costs will escalate significantly.
Shares of another member of the gig economy, DoorDash DASH, too dropped (down 5.99% on Oct 11) following the proposal to consider workers as employees in case they are "economically dependent" on a company.
DoorDash offers a logistics and technology platform to local businesses. DASH’s platform connects merchants, consumers and dashers. DASH went public in December 2020.
On being implemented, the proposal will offer benefits and legal protection to employees than contractors, thus increasing labor costs of the likes of Uber, Lyft and DoorDash and affecting their profitability in the process. Currently, Uber, Lyft and DoorDash carry a Zacks Ranks #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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