One Question

What Did California Just Do to the Gig Economy?

A new law could mean companies like Lyft and Uber have to change their business models

An Uber logo is seen on a sign outside the company’s headquarters location as people protest nearby in San Francisco, California on May 8, 2019. Photo: Josh Edelson/Getty Images

LLate Tuesday evening, the California state legislature approved a bill that would make it more difficult to classify workers as independent contractors. Its passage followed a long negotiation with on-demand app makers like Lyft, Uber, and Doordash, who have said that classifying their on-the-ground workers as employees would fundamentally change their business models. Uber and Lyft sought an amendment to the bill that would essentially exempt them from the law — they didn’t get one.

California governor Gavin Newsom has already pledged his support for AB 5 in a Sacramento Bee op-ed, and is expected to sign it into law. Here’s what you need to know.

Why is this even important?

United States law classifies almost all workers into two main buckets: employees and independent contractors. If you get placed in the first bucket, you’re protected by labor laws that guarantee you a minimum wage, overtime, and some benefits, like workers compensation and unemployment insurance. If you get placed in the second bucket, you don’t.

All of the tax and benefit obligations associated with hiring workers as employees make it a lot less expensive — about 20% to 30% less expensive — to hire independent contractors. That’s a big incentive to classify workers as independent contractors. Some companies try to cheat and say workers they’re depending on as employees are actually just freelancers. When that happens, unless those companies are successfully challenged, their workers lose the benefits and protections to which they’re legally entitled.

Whether Lyft, Uber, and companies like them are cheating by classifying their workers as independent contractors has been an ongoing debate.

What does the bill actually say?

AB 5 establishes a new standard for determining whether a worker is an independent contractor for the purpose of state laws, which include those governing California’s minimum wage, unemployment insurance, paid sick leave, and paid family leave (it is based on a California Supreme Court decision that established the standard for purposes of minimum wage). Under the new test, a person is an independent contractor if:

( A ) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

( B ) The person performs work that is outside the usual course of the hiring entity’s business.

( C ) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

So does that mean Uber drivers and Lyft drivers in California are employees now?

Passing the law is only the first step. Enforcing it is the next step.

Uber said that it would not reclassify its drivers after the law goes into effect on January 1, arguing that drivers’ work is not part of its core business.

Arbitration clauses that drivers sign when they sign up to work for services like Lyft and Uber mean that the challenge is most likely to come from a government agency (a last-minute amendment to the bill will give cities the right to sue companies that don’t comply). Last month, Lyft, Uber, and Doordash pledged a total of $90 million to fund a ballot initiative that would essentially put exempting the company’s workers from AB 5 — should it become law — to voters. Previously Uber and Lyft executives proposed that their companies would provide certain benefits to workers while maintaining their independent contractor status.

Lyft, Uber, and other on-demand apps have implied that as a result of this law, they will no longer be able to offer their drivers flexibility.

On-demand app makers have some unique advantages when it comes to such an initiative, because they can easily contact drivers and customers through their apps and email lists. Uber and Lyft, for instance, encouraged their drivers to contact legislators about AB 5 before it had passed.

How big of a deal would it be for on-demand app companies to reclassify their workers as employees?

Companies like Uber and Lyft operate globally — the soon-to-be law only applies to their drivers in California.

But California, the birthplace of the app ecosystem, is where a significant portion of those drivers live. And state laws have a tendency of catching on. Other states and the federal government may model their own legislation after California’s legislation, and that would be a very big deal for companies like Uber and Lyft.

Will this law take away the flexibility of gig economy workers?

Lyft, Uber, and other on-demand apps have implied that as a result of this law, they will no longer be able to offer their drivers flexibility.

An Uber spokesperson conceded that there is no law preventing the company from offering flexibility, but pointed Marker to a company blog post that classified offering employees the sort of flexibility that Uber’s drivers currently have as “something that is both unrealistic and never been done before: on-demand employment.”

Benjamin Sachs, a professor at Harvard Law School who specializes in labor law, wrote in On Labor that:

“In my view, this argument gets the causal arrows backward. If a firm, like Uber, exercises sufficient control over a worker’s conditions of employment, then the worker is more likely to be deemed an employee. So, increasing the degree of control increases the likelihood of employee status. But this does not mean that a finding of employee status increases the degree of control that firms exercise over their workers. In fact, a finding of employee status in itself has no effect on the amount of control–or flexibility–experienced by workers.”

He also noted that while a company could theoretically choose to take more control over schedules, but argued that they’d be unlikely to do so because flexibility is so important to their business model. Veena Dubal, an associate professor at the University of California, Hastings, told the New York Times she believes ride-hailing companies were unlikely to do so because the tools Uber and Lyft currently use to keep drivers on the road, like bonus incentives, allow the company to be more nimble at meeting customer demand than scheduled shifts would.

The bill text itself notes that “Nothing in this act is intended to diminish the flexibility of employees to work part-time or intermittent schedules or to work for multiple employers.”

This law is about all companies in California, so why are we talking about Uber and Lyft?

More than 15 trade groups lobbied for exemptions to AB 5, according to the Los Angeles Times. AB 5 isn’t about app-based platforms specifically — it impacts large industries like construction, trucking, and hospitality. But the companies that do business through their apps lobbied loudest against the bill — pledging $90 million to a ballot initiative, for instance — and in some ways are the only new part of this debate. Arguments over how companies classify workers have been raging for decades — Microsoft, for instance, faced (and lost) a lawsuit over its dubiously classified programmers in the 90s — apps are just the most recent flavor, and thus are getting the most attention.

Update: This article has been updated to further clarify Benjamin Sachs’ argument regarding AB 5’s impact on ride-hailing drivers’ flexibility.

Author and journalist, writing and editing at Medium’s OneZero.

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