California lawmakers approved a landmark bill that would force gig-economy companies like Uber, Lyft and others to treat many workers as employees instead of independent contractors, potentially devastating their business and drastically altering the ride-hailing industry as we know it.
Assembly Bill 5, which will codify a three-part test for determining worker status as written in a recent court decision, was signed by Gov. Gavin Newsom on Wednesday, September 18.
Newsom previously indicated support for the move, saying that tech companies and other employers are eroding workers' basic protections like "minimum wage, paid sick days, and health insurance benefits." In a Wednesday letter sent to California lawmakers, Newsom called the law "landmark legislation for workers and our economy."
The move could affect over 1 million workers in California.
Lyft, which is planning a $90 million fight against the new rules alongside Uber and DoorDash, said after the legislation was passed that it was disappointed in lawmakers.
"Today, our state's political leadership missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits," a representative said last week. "The fact that there were more than 50 industries carved out of AB5 is very telling. We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need."
In a blog post earlier this month, Uber outlined its proposed compromise it hopes to reach with politicians and labor leaders.
"That is why we have been at the table in California — with other rideshare companies, lawmakers, the Governor's office, and labor unions — to propose a truly innovative framework that we believe would preserve Uber's key benefit for drivers (flexibility) and key benefit for riders (reliability), while improving the quality and security of independent work," the company said.
Lorena Gonzales, the bill's sponsor, praised the Senate for finally passing the bill.
"The State Senate made it clear: your business cannot game the system by misclassifying its workers," the Democrat said in a statement. "As lawmakers, we will not in good conscience allow free-riding businesses to continue to pass their own business costs onto taxpayers and workers. It's our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs."
The bill could devastate Uber, Lyft and other gig-work companies
The law, which would take effect January 1 if signed by the Governor, would codify a three-part test that would determine a worker's status as an employee or independent contractor. That test says a worker is an employee unless the employer proves that:
(A): The worker is "free from the control and direction" of the company that hired them while they perform their work.
(B): The worker is performing work that falls "outside the hiring entity's usual course or type of business."
(C): The worker has their own independent business or trade beyond the job for which they were hired.
Lyft's CFO, Brian Roberts, told investors at a conference hosted by Citigroup last week that any increased costs associated with reclassifying drivers or the backlog of employment lawsuits would be passed through to consumers. That would mean much higher prices on rides in the state, as well as a potential slowdown in work for drivers.
An Uber executive, however, took a much harsher criticism of the bill, telling Business Insider that the law would cause a fundamental shift in how the company does business. Uber has no plans to re-classify drivers as employees any time soon, the person said.
Wall Street analysts are perhaps the most worried. Barclays estimated that the re-classification alone, and the $290 million in associated costs, could bankrupt the companies.
"Beyond higher wages, ride-hailing companies would be responsible for half (6.2%) of employees' Social Security and Medicare (1.45%) tax, as well as the costs for administering any employee benefits (e.g., health care and 401ks)," the bank's analysts said in a note to clients.
"With current driver earnings and incentives running at an estimated 78% and 76% of gross bookings for Uber and Lyft, respectively, a 25% increase in driver wage/benefit costs would essentially drive take rates to zero (absent rate increases to riders)."
"We think an adverse ruling on the contract workforce issue would potentially bankrupt both Uber and Lyft," they concluded.
Shares of Uber and Lyft fell less than 1% in early trading Wednesday following the bill's passage through the Senate.
Gearing up for a $90 million fight
If the bill becomes law and no deal is reached, Uber, Lyft and DoorDash have pledged a $30 million each for a ballot proposal to exempt themselves from the new rules.
Among Uber and Lyft's proposals for an alternative is a minimum wage for drivers while they are on their way to a ride, or actively shuttling passengers, as well as portable benefits that would follow them between jobs, and a collective bargaining agreement.
The companies are hoping to pioneer what's known as "sectoral bargaining," a popular labor technique in European countries, in the United States. That would mean Uber, Lyft and other gig-work companies would bargain with the industry at-large, and not just workers on their platform.