Big changes are afoot for the gig economy. California’s Senate passed a landmark bill on Tuesday night that could make Uber, Lyft, DoorDash, Postmates and other gig economy companies. Gov. Gavin Newsom has said he’ll sign it into law.
The prospective law, AB 5, could upend these gig economy companies, which have businesses hinged on bringing aboard hundreds of thousands of independent contractors whose labor is far cheaper than that of employees. The setup benefits the companies by shifting many costs to the workers. For example, Uber and Lyft drivers supply and maintain their own cars and also pay for their own health care. The drivers also aren’t given benefits, such as sick days or overtime pay.
Uber and Lyft have both said their businesses could be broken if they’re required to reclassify their drivers as employees. The move would bring a new set of costs to the companies — both of which are struggling to become profitable. Uber hadin the past six weeks to control its costs.
When Uber filed to become a publicly traded company, it specifically identified the risk in a filing with the Securities and Exchange Commission. “Our business would be adversely affected if drivers were classified as employees instead of independent contractors,” it wrote.
Tony West, Uber’s chief legal officer, didn’t appear too worried during a press call with reporters on Wednesday.
“This business is incredibly adaptable and has withstood enourmous enourmous challenges to its business model and has always come through those stronger and more responsive,” he said. “I do feel confident that we are going to be able to manage through this just as we have been able to manage through in the past.”
Once signed by Newsom, AB 5 is set to go into effect on Jan. 1, 2020. Under the bill, all companies using independent contractors in the state will be put to a three-part test that looks at how much control the company has over its workers. This includes things like whether or not the company has workers wear uniforms, use the company’s equipment and follow business mandates.
West believes Uber will pass this test, however, and therefore its workers won’t be required to become employees.
“Under that three-part test, arguably the highest bar is that a company must prove that contractors are doing work ‘outside the usual course’ of its business,” Tony West, Uber’s chief legal officer, said during a press call with reporters on Wednesday. “Just because the test is hard doesn’t mean that we will not be able to pass it.”
“Because we continue to believe drivers are properly classified as independent… drivers will not be automatically reclassified as employees, even after January of next year,” he said.
California sets the stage
What happens in California rarely stays there. By dint of its size, the Golden State often sets legal and regulatory standards for the country. The state is the largest by both population and economic activity, and that size means companies around the world have to meet its often-strict and precedent-setting standards if they want to tap the lucrative market.
In addition to AB 5, the state passed the California Consumer Privacy Act, which sets standards for collecting information online and goes into effect in January. The state’s rules and laws on fuel efficiency, emissions and air quality have affected automakers around the world. And the California Assembly just passed a bill that would allow college athletes to be paid for the use of their likeness.
San Francisco and Oakland passed the earliest laws in the US curbing the use of facial recognition technology, and San Francisco was among the first cities to curb, requiring hosts to be registered with the city.
AB 5 could serve as a first step to broader oversight of the gig economy. Already New York City ensures drivers earn at least $17.22 per hour for each trip they make and has put limits on fleet sizes to prevent congestion. Washington state and Oregon have considered legislation similar to AB 5.
Michael Droke, a labor and employment partner at Dorsey & Whitney, said AB 5 will likely spur other states into action.
“While limited workers to California, other states are likely to enact similar legislation,” Droke said.
Support for AB 5 was evident among ride-hail drivers in California. Thousands of drivers across the state rallied to whip up support for AB 5 as it made its way through the legislature. Theyand . Many .
“AB 5 is only the beginning,” according to Edan Alva, a ride-hail driver who was involved in AB 5 organizing with the group Gig Workers Rising. He says the momentum for change is building. “Just because someone really needs to work does not mean that their rights as a worker should be stepped all over.”
Uber and Lyft have said the majority of their drivers don’t want to be employees, a status that would change the relationship between the companies and the workers.
The companies have said that if they couldn’t strike a deal on AB 5, they’dby sponsoring a ballot initiative in November 2020 that would exempt them from the law. Along with DoorDash, Uber and Lyft have said they’d spend $30 million each to sponsor the initiative.
“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,” Adrian Durbin, a Lyft spokesman, said in an emailed statement.
Originally published Sept. 11.
Update, 2:07 p.m.: Adds attorney comment. Update, 3:11 p.m.: Adds comments from Tony West, Uber’s chief legal officer.