Traffic at night in California.
Mike Blake/Reuters

Legislators approved a bill that would reclassify Uber and Lyft drivers as employees, but the debate over gig worker rights is only beginning.

Updated: September 11, 2019

A landmark bill that would make many gig workers full employees was approved by legislators late Tuesday night in California, after months of tension between labor groups, on-demand economy companies, and workers’ rights advocates. After endorsing the measure on Labor Day, Governor Gavin Newsom is expected to sign it into law after the legislative session ends on September 13. The measure would go into effect on January 1, 2020.

Under Assembly Bill 5, close to 1 million ride-hailing workers, on-demand delivery drivers, manicurists, and janitors in California will be eligible for the same benefits, minimum wage, and vacation days that full employees are.

Experts say AB5 has the potential to curb labor violations, increase employee bargaining power, and fundamentally change the nature of gig work. By driving up operating costs for Uber and Lyft, which lobbied hard to fight the bill, it may also have an effect on the streets of California’s cities—and inspire copycat legislation outside the state.

Long road to realization

The gig work bill’s passage was the culmination of a decade-long fight to reclassify independent contractors, sparked by a court case filed long before transportation network companies (TNCs) like Uber and Lyft began their disrupting.

In 2005, a former worker for the courier service Dynamex sued the company, arguing that he and his coworkers had been misclassified as contractors to save the company money. Last year, California’s Supreme Court ruled in the former employee’s favor, establishing an “ABC test” that the state must now use to determine whether workers are employees or true independent contractors: If they’re performing a task that’s central to the company’s functioning, and if their wages are set by the company, they’re more likely to be considered employees. It’s this Dynamex decision that AB5 codifies.

In the months since AB5 was introduced in December by Democratic Assemblymember Lorena Gonzalez Fletcher, the bill has gone through several iterations. Its final form includes carve-outs for certain industries: Lawyers, architects, realtors, hairstylists, and fishermen aren’t subject to the ABC test, because their industries allow them to negotiate. Freelance writers and editors are also exempt.

Many industries that were eligible lobbied hard for exemptions. Among them was the California News Publishers Association, which wrote an opinion piece in the San Francisco Chronicle saying AB5 could gut the print news business by reclassifying newspaper carriers. In the version agreed upon this week, the group was exempted. The trucking industry also carved out a few amendments making sure “owner-operators” won’t be subject to the ruling, but the port trucking industry, which is infamous for wage violations, is fair game.

But the companies behind the app-based on-demand workforce—which in California is made up of about 400,000 people driving for Uber and Lyft, delivering food for Postmates or Instacart, or doing odd jobs for companies like Task Rabbit—have proved the most active opponents, saying AB5 poses an existential threat to their operations.

In addition to balking at the increased operating costs associated with paying workers more, they—and several drivers—have argued that AB5 will undermine the flexibility that’s been the core promise of the gig economy. Unlike other on-call jobs that make up the majority of hourly work, in which scheduling can be as unpredictable as it is restrictive, Uber and Lyft drivers can set their own hours, and sign in and out of the app at will.

But drivers, organizing groups, and labor experts argue that in practice, drivers already have less control than they may appear to: They must drive at high-demand times to maximize returns, and can be deactivated—effectively, fired—without warning.

“[W]ith low, nonlinear pricing (which forces them to work long hours) and incentive-based pay (which forces them to work strategically, during high demand), the work lives of gig workers remain highly structured,” wrote Sanjukta Paul, an assistant professor of law at Wayne State University and an antitrust and labor expert; and Veena Dubal, an associate professor of law at the University of California, Hastings, in a paper for On Labor. “Without basic protections and collective bargaining rights, workers in California have no means (short of a full-fledged strike) to change this.”

Still, a measure like AB5 could push Uber and Lyft to give preference to the workers who can and do work full-time hours in California, says Robert Maxim, a research associate for the Brookings Institute’s Metropolitan Policy Program. Already, Uber has said that it would have to institute more strict scheduling if the bill was passed.

“This could theoretically limit drivers’ abilities to drive when they want, the shifts they want, and of potentially driving for both Uber and Lyft,” Maxim said. “The potential impetus for asserting more control over drivers’ schedules comes from the fact that it shifts risk from the drivers themselves onto the companies.”

How existential is it?

Because it would bring drivers’ paychecks up to local minimum wage ($15 in San Francisco), and tack benefits on top of it, the bill could add as much as 30 percent to Uber and Lyft’s labor costs, according to the L.A. Times. Barclays estimates that all told, Uber’s annual operating costs in California will grow by more than $500 million, and Lyft’s will grow by $290 million.

The beneficiaries of these funds will be drivers, some of whom report sleeping in their cars and scraping by at less than $4 an hour; and California itself, whose Department of Industrial Relations estimates that the state loses about $7 billion a year in payroll taxes due to company misclassification.

Uber and Lyft, both of which have been bleeding money at a rapid clip and watching their stock valuations tumble, will likely pass on some of those new costs to riders. Morgan Stanley analysts cited by Alison Griswold in Quartz predict that, when AB5 takes its full effect, statewide fares will increase by about 25 percent.

“The pincers are closing in on the TNCs. You’ve got AB5, you’ve got investors who are getting increasingly restive about wanting to see a path to profitability, you’ve got the share prices going down,” said Bruce Schaller, a transportation consultant and the former Deputy Commissioner of Traffic and Planning at the New York City Department of Transportation. (Schaller is also an occasional CityLab contributor.) Though he says that it’s anyone’s guess how the companies will actually adjust to such a reality, “if they feel they need to get closer to at least break even financially, it has to involve, to some degree, increasing fares.”

That, in turn, might cut down on demand. Morgan Stanley analysts estimate that “if similar legislation were adopted nationally,” higher fares “could cause global ride-hail bookings to fall by 1 percent to 2 percent, and 5 percent to 9 percent,” according to Griswold.

For transportation planners, this might not be a wholly unwelcome outcome: Research shows that Uber and Lyft contribute to congestion and eat into public transit usage in some cities.

In a report on the connection between ride-hailing and congestion by Fehr & Peers commissioned by Uber and Lyft this summer, researchers found that previous estimates of Uber and Lyft’s effect on traffic had been conservative. In San Francisco County, “Uber and Lyft make up as much as 13.4 percent of all vehicle-miles,” my CityLab colleague Laura Bliss reported on the findings. In Los Angeles, the only other California city the report looked at, TNCs made up as much as 2.7 percent of all vehicle miles.

But the other takeaway from the report, Bliss wrote, was that drivers in personal vehicles contribute to congestion a lot more than TNCs. Reduced Uber and Lyft usage could just as easily push more people into their cars as push them onto buses, says Arielle Fleisher, SPUR’s Transportation Policy Director in San Francisco.

“There is some sort of opportunity here,” she said, to divert those who may otherwise take Ubers onto transit. But “fundamentally, if the goal is to increase public transit use, … people will use public transportation when it works for them: when it’s frequent, reliable, accessible, and legible.”

After New York City established a minimum wage for drivers last year, prices rose, and the ride-hail companies limited the number of new drivers they’d accept onto the platform. But it’s hard to isolate the effect of those wage raises, says Brookings’ Maxim, because the city has also instituted congestion pricing since then. (If California’s legislation leads the companies to limit the size of their fleet, existing drivers may actually benefit, he says: “By limiting the supply of drivers, there’s in theory at least more money to go around for each individual driver.”)

Paul, the antitrust expert, suspects that the greatest threat AB5 poses to Uber and Lyft comes with the collective bargaining rights drivers will be granted. “The possibility of having to deal with an organized voice for workers, in what the hell happens in their company, [is scariest],” she said. “It’s that perceived loss of control, and any level of transparency that would bring.”

Driver-organizers agree. “AB5 is only the beginning,” Edan Alva, a driver and member of the advocacy group Gig Workers Rising, said in a statement to TechCrunch. “I talk daily to other drivers who want a change but they are scared. They don’t want to lose their only source of income. But just because someone really needs to work does not mean that their rights as a worker should be stepped all over. That is why a union is critical. It simply won’t work without it.”

There’s also a potent symbolic weight to AB5’s passage, says Schaller: that the days of Uber and Lyft lobbying their way past government regulations are over.

“They rolled through legislatures—starting with California—from 2014 to 2017, and now they’re getting all of the pushback from legislative frameworks that were completely skewed towards their interests as they construed them,” he said. “Bullies always get their comeuppance, sooner or later.”

A thwarted counter-campaign that’s not over yet

To sway legislators into voting down the measure, Uber and Lyft ran coordinated email campaigns to encourage drivers to rally against the legislation in Sacramento last month, and gave bonuses to those who showed up. All the while, they’ve been pushing a compromise deal, that would get drivers portable benefits, guaranteed wage raises, and a sectoral bargaining unit, without reclassifying them entirely.

As AB5 kept accruing “yes” votes in California’s legislature, however, the two companies—along with on-demand delivery giant Doordash—each contributed $30 million to support a counter-measure, which they hope to place on California’s 2020 ballot. “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 industrywide sectoral bargaining, without jeopardizing the flexibility drivers tell us they value so much,” Adrian Durbin, a Lyft spokesman, told the New York Times.

The San Francisco Chronicle reported Monday that behind the scenes, Uber has also been working on drafting a bill that would create a new category of driver that’s neither employee nor contractor, guarantee them some benefits and a weekly pay of “1.27 times minimum wage in the city where the ride or delivery started,” and reimburse them for some operating costs of the vehicles. (Critics noted that these fees only account for time spent driving, not the idling time many drivers say makes up a large part of their days.) It calls for a Driver Advocate Program, too, which would represent drivers but not afford them negotiating rights.

Such a bill is highly unlikely to pass before the legislative session ends Friday, wrote Chronicle reporter Carolyn Said, but it provides a preview of what an eventual ballot measure might look like. Lyft said it supported the measure, but was not involved in drafting it.

On Wednesday, Uber’s Chief Legal Officer, Tony West, said the company would not comply with AB5, despite not being technically exempt from the ABC test. “[J]ust because the test is hard does not mean we will not be able to pass it,” he wrote. “Because we continue to believe drivers are properly classified as independent, and because we’ll continue to be responsive to what the vast majority of drivers tell us they want most—flexibility—drivers will not be automatically reclassified as employees, even after January of next year. We expect we will continue to respond to claims of misclassification in arbitration and in court as necessary, just as we do now.”

Who’s next?

California is the birthplace of Uber and Lyft, and their largest market. But it isn’t the only jurisdiction that’s been eyeing a reclassification fight.

Democrat-led Oregon and Washington, both leaders in the fight to give gig workers enhanced labor rights, have explored bills pushing independent contractors closer to employees, giving them base wages and workers’ boards. Though the bills failed to gain momentum, they may find it now. Massachusetts and New Jersey have ABC tests for independent contractors on the books that resemble the one established under the Dynamex decision, and could form the basis for similar legislation. After New York City established the country’s first ride-hail minimum wage—inspiring other ride-hail organizers to ask their cities to do the same—New York State Governor Andrew Cuomo indicated this week that the state may go further. Courts in the United Kingdom have already ruled the ride-hail drivers should be eligible for minimum wage and paid holidays; though Uber has appealed the ruling, labor activists there are busy bolstering their case.

“At least in the short run, we’re probably going to end up with an increasingly patchwork system [in the U.S.],” said Maxim. “With places like California treating drivers as employees, red states keeping status quo, and then some states or cities even creating this hybrid middle grounds, akin to what New York City currently has.”

AB5 could also open the door for lawmakers to hold Uber and Lyft accountable to addressing other public policy issues, like congestion. “It will be much easier for governments to take action,” Schaller said. “Because they’ve been through this, and they know they can win.”

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