The California State Senate on Tuesday evening passed a controversial bill that would dramatically limit companies’ ability to classify workers as independent contractors — a change expected to strike at the core business model of gig-based tech companies such as Uber and Lyft.
Assembly Bill 5 (AB5) then passed the Assembly early Wednesday and was sent to Governor Gavin Newsom’s desk that afternoon. Newsom supports the legislation, though he told the Wall Street Journal he is talking with Uber and Lyft about how they will be affected.
If signed, AB5 would require many workers to be classified as employees, making them eligible for minimum wage, overtime pay, unemployment insurance, Civil Rights Act protections, and other benefits guaranteed to employees under California law.
AB5 would codify a decision by the California Supreme Court in the 2018 Dynamex case, which established a strict “ABC test” to determine whether workers are employees or independent contractors.
Under the standards, a worker would be classified as an employee unless:
(a) The worker is performing work free from control of the hiring entity.
(b) The work is “outside the usual course of the hiring entity’s business.”
(c) The worker is customarily engaged in an independent trade.
Democratic Assemblywoman Lorena Gonzalez, who authored the legislation, said that it “isn’t perfect, but I think this goes a long way to protecting workers, legitimate small businesses, legitimate businesses that play by the rules, and we as taxpayers that have to clean up the mess when these businesses don’t provide enough for their workers.”
The bill includes exemptions for many industries, but not for gig-reliant ones, which are expected to be the most hard hit.
Proponents of the bill hope it will open the possibility that drivers for ride-sharing platforms such as Uber and Lift will be able to form unions, something they are unable to do as independent contractors.
But the tech firms are resisting the change. Uber announced that, even if the bill goes into effect as expected in January of next year, the company will not treat its drivers as employees.
Tony West, Uber’s top lawyer, explained the strategy: convince courts that drivers’ work is “outside the usual course of the hiring entity’s business” by defining their business as unrelated to driving.
Uber’s business isn’t providing rides, West, said, but “serving as a technology platform for several different types of digital marketplaces.”
The rideshare platform is teaming up with Lyft on a $60 million fund for a statewide 2020 ballot initiative that would create an alternative classification for drivers, giving them a guaranteed minimum pay and some protections without making them employees.
Ryan Vet, an entrepreneur and gig economy expert, weighed in, saying the legislation could benefit existing independent contractors while impacting the experience of consumers.
“We have been able to get a quick and easy, safe ride from one place to the next,” he mused. “We have been able to get food delivered to our door, or a package delivered on Sunday. This is not only going to affect the worker but the consumers that are benefiting from these services — it is more than a two-sided equation.”
Indeed, Uber and Lyft have already threatened to pass costs onto consumers.
But will AB5 prove as consequential for the billion-dollar firms as the controversy would lead one to believe?
Bloomberg market analyst Noah Smith explains that the law may provide cover for the companies present failures:
Uber continues to be a cash-burning machine. In the second quarter of 2019, partly because of costs associated with going public in May, it had a net loss of $5.2 billion — more than 10 times the highest estimates for what the new California law could cost it. But even in a normal quarter, the company’s losses are on the order of more than a half-billion dollars, and it has never made an operating profit.
Smith notes that Lyft is likewise losing money before concluding: “New laws like California’s might allow gig-company founders a face-saving way to claim that it was regulation that killed them, not the bleak unit economics of the basic business model.”
While the media focuses primarily on how AB5 will affect large tech companies, the question is how it will impact the business of smaller firms that rely on independent contractors and don’t have Uber’s deep pockets.
Governor Newsom’s talks with the rideshare monoliths points to the possible occurrence in California of a common phenomenon in the world of regulation: Though the large corporations kick and scream about regulations in public, in private, they’re often the ones calling the shots.
This was seen in Franklin Roosevelt’s New Deal, for instance, during which the National Recovery Administration, an agency designed to set prices and create codes of fair practice, was dominated by the wealthy captains of industry, such as General Electric President Gerard Swope and Standard Oil chairman Walter Teagle.
Ultimately, they used their authority to set operating standards that were too expensive for smaller companies to bear, strangling the competition out of existence.
Are small business in California on the way to a similar fate — crushed by an alliance of Big Business and Big Government in the name of workers’ rights?
Photo: Boogich / E+ / Getty Images Plus
Luis Miguel is a writer whose journalistic endeavors shed light on the Deep State, the immigration crisis, and the enemies of freedom. Follow his exploits on Facebook, Twitter, Bitchute, and at luisantoniomiguel.com.