California is about to rewrite the rules of the gig economy

September 7, 2019

California is in the final stretch of its bid to regulate the gig economy.

On Aug. 30, the state’s Senate Appropriations Committee cleared Assembly Bill 5, moving it a crucial step closer to becoming state law. It is now widely expected the bill, known as AB5, will pass a full Senate vote before the legislative session ends Sept. 13 and be signed by governor Gavin Newsom. The bill would likely force many gig companies to reclassify their independent contractors as employees, pulling the very foundation of the gig economy out from under it.

Newsom had kept his cards close to the vest on AB5, but on Sept. 2—Labor Day in the US—he publicly declared his support for the bill in an op-ed in the Sacramento Bee. “Reversing the trend of misclassification is a necessary and important step to improve the lives of working people,” Newsom wrote. “That’s why, this Labor Day, I am proud to be supporting Assembly Bill 5, which extends critical labor protections to more workers by curbing misclassification.”

Easy as 1, 2, 3
AB5 would codify the test for determining whether a worker is a contractor or an employee that was outlined by California’s supreme court last year in its Dynamex decision (pdf). The court instructed hiring firms to apply a standard commonly referred to as the “ABC” test, which says a worker is “properly considered” an independent contractor to whom certain wage and hour regulations don’t apply only if:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business;

and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Previous debates over whether workers such as Uber drivers or DoorDash couriers are contractors, as the companies tend to claim, or employees have focused on how much control these firms exercise over their workers. This is similar to A in the ABC test, and there is evidence for both sides. Uber drivers set their own schedules and enjoy a degree of flexibility uncommon in many employee positions. They do not, however, set the rates they earn as an independent contractor like a plumber might, or have much control over where their work takes them. Gig companies also tend to manage their workers indirectly—through algorithms and user-based ratings systems—and can “deactivate” workers who fall below a certain threshold, which is tech-speak for firing.

It’s harder to argue both sides on B. Do Uber or Lyft drivers perform work “outside the usual course of the hiring entity’s business”? It seems pretty clear that drivers drive, and driving is essential to the “usual course” of business for Uber and Lyft. You could say the same of couriers who deliver food for food-delivery companies such as DoorDash and Postmates. As for C, Uber CEO Dara Khosrowshahi planted the idea that Uber drivers are independent business operators on the company’s second-quarter earnings call on Aug. 8, noting that they “run their own business.” It’s an old Uber talking point that seems to have been rehabbed recently.

Plan B(allot)
Perhaps the surest sign that AB5 will become law is that gig companies have shifted gears from trying to crush the bill to planning a ballot initiative that would exempt them from it. Uber, Lyft, and DoorDash last week pledged $90 million to a ballot initiative that would preserve the independent-contractor status of drivers while allowing the companies to provide some benefits. That’s not cheap, but it’s a lot less than the estimated $800 million Uber and Lyft combined would owe per year in added payroll taxes, training costs, and workers comp if their workers were employees. “As a Plan B, we are reluctantly funding this initiative,” Uber chief legal officer Tony West told the New York Times.

Uber’s latest proposal includes paying drivers a minimum of $21 per hour, including the cost of average expenses, while on a trip. That sounds pretty good until you consider that the average ride-hail driver across six US metro areas spends about 33% of their time waiting for a fare, another 9-10% driving to pick up that fare, and only about 58% of the time with an actual passenger in the car, according to a recent study commissioned by Uber and Lyft. Depending how you define “on a trip,” that means the typical driver isn’t “working” for 33% to 43% of every hour, putting the effective hourly wage at closer to $12 to $14. (New York City’s pay floor for ride-hail drivers cleverly solved this problem by adjusting for driver wait-time with a “utilization” rate.)

Other gig companies have also offered concessions. Postmates announced an expanded partnership with Stride Health to give 350,000 couriers access to a “full suite of health and wealth benefits and rewards through the Stride mobile app.” AB5 could hit Postmates particularly hard because roughly 40% of its revenue comes from sales in California. Instacart promised similar health and wellness benefits, workplace injury coverage, a student-loan repayment program, and a free membership with, a platform for home care providers like child care, senior care, and pet care.

Uber has launched a website, (not to be confused with the Independent Drivers Guild) that it bills as a “one-stop-shop for information, updates, and action in support of driver flexibility and independence.” The site features a small number of video testimonials from drivers who “care about being independent” and invites visitors to record a message “about why flexibility and independence are important.” Uber also published a blog post on Aug. 30 making its case for “progressive legislation”—read: not AB5—and citing a bunch of its own research, because policy fights like these are what Ubernomics was made for. Uber and Lyft previously paid drivers to protest AB5, and encouraged them to contact their legislators to oppose the bill.

What happens next?
The huge unanswered question is what happens if AB5 is passed and signed into law. It’s one thing to talk about reclassifying hundreds of thousands of workers from contractors to employees and another to actually do it. Presumably there would be a lot of paperwork. In addition to having to deal with payroll taxes and workers compensation and minimum wage and other things like that, there’s also the very real question of how many workers these companies could actually sustain once employee-related costs got added to the equation. The uncertainty of it all is rattling investors. After Newsom endorsed AB5, Uber’s and Lyft’s stock prices, already trading well below their IPO prices, sunk to fresh lows.

In a research note published Sept. 5, analysts at Morgan Stanley said they expect the ride-hail giants to fight AB5 if it passes with lobbying and litigation, delaying enforcement of the law and “any material fundamental impact” from the bill until 2021. If and when that impact occurred, the analysts said they expected Uber to pass the bulk of increased costs along to consumers, leading to fare increases of around 25%. They estimate that could cause global ride-hail bookings to fall by 1% to 2%, and 5% to 9% if similar legislation were adopted nationally.

Lyft late last month released a report from Beacon Economics, a consulting firm, that said reclassifying drivers as employees could mean the company could require as many as 300,673 fewer drivers. The report, prepared by Beacon Economics, relies heavily on previous research (pdf) co-authored by economists at Uber.

“We are working on a solution that provides drivers with strong protections that include an earnings guarantee, a system of worker-directed portable benefits, and first-of-its kind industry-wide sectoral bargaining, without jeopardizing the flexibility drivers tell us they value so much,” Adrian Durbin, a Lyft spokesman, said in an emailed statement. Sectoral bargaining is a form of collective bargaining favored by politicians including Bernie Sanders that aims to change workplace policies across an entire industry or sector rather than at the individual company level.

Uber has repeatedly said if drivers were employees, it would “likely have to exert more control over drivers” and “would likely hire far fewer drivers than we currently support.” As much as that sounds like a threat, it also may be the truth. A 2017 economics paper co-authored by Uber researchers and John Horton of NYU argued Uber could do little to raise fares so long as it maintained an open market where drivers could come on and off as they pleased. The logical inversion was that for Uber to raise wages, it would have to close the market, limiting the number of drivers who could come on at any given time, and the hours they could work.

This is already proving the case in New York City, the only metro area to have set a pay floor for ride-hail drivers. After the pay floor took effect, both Lyft and Uber stopped accepting new drivers. Lyft also started giving priority to certain drivers, such as those who maintained especially high acceptance rates or who rented their vehicles directly from its Express Drive program, forcing other drivers off the road when demand is low.

It’s not so crazy to think that if and when AB5 becomes law, something similar could happen in California. That could anger gig workers who find themselves out of jobs, so to speak, if the platforms they depend on tighten their work requirements and offer fewer work slots. Any ballot initiative companies like Uber and Lyft end up pursuing will likely attempt to portray AB5 as a misguided policy choice that hurts workers more than it helps them, and that punishes consumers with higher prices, in hopes of swinging voters to their side and gaining an exemption from the legislation.

Alison Griswold