Driver strikes portend perils for Uber on IPO day

Uber and Lyft driver strikes over wages and classification on Wednesday portend significant challenges for the former company on the day of its initial public offering, though opinions differ on whether thousands of drivers going dark could mar the big day itself.

The roughly 4,400 Los Angeles Uber or Lyft drivers organized as Rideshare Drivers United are among 30,000 doing the work full time for one or both companies in the city, according to the strikers’ web site. A concurrent blackout and noon rally at Uber’s headquarters took place in the Bay Area organized by a parallel group of drivers. Similar shutdowns were arranged for other major cities as well.

“I’m not sure how much it’ll scare investors, but it might remind us of some issues,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital, a manager of IPO-focused exchange-traded funds.

Kennedy also said since Uber has operated at a loss, if the company wants to close the gap it presumably needs to raise the charge on drivers or riders, but added, “Strikes make option two seem less viable. If drivers are already upset with their take, it seems less likely.”

In addition to the strikes, in its SEC filing ahead of the IPO, the company admitted, “As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

Drivers have also increasingly taken issue with their classification as independent contractors. Uber’s filings indicate it would be “adversely affected” if drivers were converted to employees. That dispute lies at the heart of multiple lawsuits and tens of thousands of arbitration demands asserting misclassification, emboldened by employee-presumptive legislative efforts and court rulings like California’s Dynamex decision.

“For Uber to put misclassification so high in their risk factors [on the S-1 form] is quite unique in terms of recognizing liability on, frankly, their whole business model. The strike puts a damper on the IPO, but I’ve never seen a company go public when one of their risk factors involves a massive legal battle like this,” said Sara Terheggen, managing director of The NBD Group.

“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,” a spokesperson for Uber said in an e-mailed statement, pointing to improved incentive programs and gross pay figures from the past year for drivers.

However, Michael B. Dorff of Southwestern Law School said the true road to profitability lies in cutting out the drivers entirely.

“The key is going to be eliminating drivers from the equation. One indication of the core problem with their business model is how even though drivers are dissatisfied with pay they’re losing money hand over fist. If they end up having to raise driver compensation, it will drive them even deeper into the red,” he said.

According to Uber’s SEC filing, it operated at a loss of $7.9 billion over the last two years. In Dorff’s opinion, the only feasible route to closing the gap is betting on driverless vehicles. That means that Uber is asking investors to bet on it in a footrace between bankruptcy and the mass availability of autonomous cars.

“It all goes to the question of what their burn rate is and how quickly they can get driverless cars to scale,” he said.

According to Glenn Danas of Robins Kaplan LLP, pressure is mounting and the classification cloud looms closer.

“Uber has been adept, so far, at avoiding rulings on the merits of the misclassification issue by relying on mandatory arbitration agreements as a shield. But I think that some of the pending suits are going to force a resolution of the independent contractor issue,” he said, pointing to those filed by competitors alleging the company’s business model is unfair practice.

“Under California law and Dynamex, it certainly appears that Uber drivers will be considered employees,” he said.

Employee conversion for Uber drivers would also allow them to organize effectively. Under federal law, independent contractors are allowed to join unions, but have no power to compel negotiations or recognition from management, and any significant strike would run afoul of antitrust statutes.

Uber’s market fate could also be weighed down by Lyft, which went public in March but saw its stock drop over 20 percent since then. Kennedy also added that if unchecked, strikes and driver dissatisfaction could harm the company’s price down the road.

“If they put a dent in the company’s revenue growth, it would severely hit the stock price when they report 2Q numbers in July, or if investors believe that to be the case prior to the release of 2Q financials,” he said.

Challenges aside, he added that Uber should cruise to the top spot on the IPO leaderboards for the year, with valuation estimates around $90 billion. Uber’s shares are expected to price between $44 to $50 dollars. The company’s shares could start trading on the New York Stock Exchange as early as Friday.