While Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), DoorDash (NYSE: DASH) and Grubhub (NYSE: GRUB) have significant exposure to potentially dramatic regulatory changes to the employment classification of the drivers critical to their operations, Mizuho Securities USA is not ready to issue a sell rating on the companies just yet.
In fact, the investment house, part of Japan-based Mizuho Securities, a wholly owned subsidiary of Mizuho Financial Group, believes there is upside to Uber and Dash and little downside to buying Grubhub at this time.
“We believe the recent 20%+ sell-off of gig economy names such as Uber and Dash appear overstated,” the firm said in an investment note Tuesday. “We view the true battlefront to be at the state level and expect [Massachusetts] and [New York] will be key states to watch. That said, the outcome of Prop 22 in … California establishes a strong precedent for the rest of the country.”
Mizuho maintains a buy rating on Uber with a price target of $72 and neutral ratings on DoorDash and Grubhub with targets of $155 and $72, respectively. Uber’s stock has ticked up since the depths of the pandemic, rising to $50.78 per share in midmorning trading Thursday, although that is down from about $64 per share in mid-February. Similarly, DoorDash, which went public in December 2020, is well below its peak of nearly $260 per share on Jan. 26 and was at $148.96 midmorning. Grubhub is also trading well below its one-year high at $59.90 midmorning, off from around $85 in October 2020. Lyft, which Mizuho didn’t offer an outlook on, was at $54.78 midmorning Thursday, off its most recent high of $68.75 on March 18.
The investment note followed a call with the company’s head of government affairs, David Landers. The note summarized that conversation and was written by James Lee, managing director; Ishant Goel, associate; and Wei Fang, vice president.
Earlier this month, the U.S. Department of Labor (DOL) rescinded a rule instituted by the Trump administration in early January that many claimed would have made it easier for companies to classify workers as independent contractors.
The withdrawal of the rule by DOL’s Wage and Hour Division leaves the status quo in place but has many supporters of gig work concerned the current administration will push to classify the workers as employees.
“The rescinded rule was a needed update to the complicated economic realities test for independent workers. The rule reflected a modern view of the workforce and economy. The path sought by this administration is to move backwards on behalf of political stakeholders rather than pushing forward and listening to the actual workers who are impacted by this policy,” the Coalition for Workforce Innovation, which represents companies that utilize independent contractors, said at the time.
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Even with the uncertainty withdrawal of the rule has created, Mizuho still sees upside for the companies employing gig workers.
“First, we believe DOL appears to be issuing guidance to classify gig workers as full-time employees, as opposed to making a rule change,” the investment firm’s note said. “Second, the legislative path appears to be narrowed due to a divided Congress; therefore we believe that the PRO Act is unlikely to pass the Senate.”
The Protecting the Right to Organize Act (PRO Act), which passed the House in March, faces an uphill climb in the Senate, where it appears there are not the 60 votes needed to pass the legislation. The bill would create a federal definition of an independent contractor.
“The proposed law, Protecting the Right to Organize Act, caters to the ultimate legislative goal of labor unions,” Mizuho said. “It would overturn states’ right to work laws, which we believe is both ambitious and controversial. In short, the proposed law redefines independent contractor versus employee classification using the California AB5 standard.”
Mizuho also doesn’t see a federal regulation coming at this point.
“We do not believe DOL plans to push out a new rule immediately since this process could face resistance from various parties and a staff guidance is more straightforward while upholding the executive branch’s political narrative,” the note said.
An executive order, Mizuho said, could be ineffective.
“Executive orders may not be effective as they can be challenged in the court,” the firm said. “To maintain his pro-labor stance, the president has recently set up a White House task force in support of unionization and potentially dig deeper into gig worker issues. However, we believe the task force is probably not effective for a specific labor classification.”
Mizuho sees the most likely path forward being either an executive order or “staff guidance” from DOL.
“We believe that DOL’s staff guidance is the most likely scenario,” it said. “In that case, if labor unions decide to file suit against Uber, Lyft and DoorDash in federal court, the judge would most likely evaluate DOL guidance and [California’s Prop 22]. Since federal labor statutes for employees and contractors are ambiguous, we believe the staff guidance is not enough to win over a precedent at the state level. That said, we believe that the legal classification of gig economy workers is likely to stay unchanged at the federal level.”
The U.S. Supreme Court recently had the chance to weigh in but declined. A case involving the classification of Uber Black drivers as employees rather than contractors is not going to be reviewed by the Supreme Court, which kicked it back to the trial court in the 3rd Circuit.
The high court denied review in the case of Razak v. Uber Technologies. Originally filed in the Eastern District of Pennsylvania, the case centered on a group of drivers in the Uber Black service, which supplies higher-quality “black cars” to Uber customers, who had sued the parent company saying they should be classified as employees, not as drivers.
A lower court in the case held for Uber through summary judgment, finding that the drivers were contractors rather than full-time workers entitled to such benefits as minimum wage payments. But in March 2020, the 3rd Circuit overturned the lower court ruling, questioning its reasoning in the summary judgment.
A set of bills that have been introduced in the New York Legislature would allow drivers to receive union negotiating rights. The bills would require “network companies” such as Uber and Lyft to sign “labor peace” neutrality agreements with a union experienced in representing network workers. The unions, if 10% of the drivers from one or more network companies sign authorization forms, would then bargain on behalf of all drivers for all network companies and once approved by a majority of workers, those negotiated terms would become state regulations governing the industry.
On its Q1 earnings call, Uber CFO Tony West was asked about the Biden administration’s approach to gig workers and the impact it could have. West said he believes the makeup of the administration, and recent comments by Labor Secretary Marty Walsh, who indicated in an interview with Reuters that the administration wanted to “engage key companies,” represented an opening.
“The fact that the labor department has said that they want to engage key companies on this issue … [suggests] they’re not planning to offer new regulations for independent contractors in the near future,” West said. “We think all of that creates a real opportunity for a dialogue that can ultimately lead to a solution that gives gig workers the protections that they deserve while preserving the innovation that gives them the flexibility that they desire. So we think there’s space here for a conversation.”
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