The gig economy is under attack in California.
On Tuesday, California lawmakers passed the AB5 bill, which will require app-based companies like Uber Technologies Inc (NYSE: UBER) and Lyft Inc (NASDAQ: LYFT) to provide employee benefits to their contact workers.
"Last year the Supreme Court ruled on a decade-long case about what constitutes an employee. It was a decision called the Dynamex decision and in that, the judge said, enough of this old test. It's very simple," said Congresswoman Lorena Gonzalez (D), author of the bill. "If you do the primary work of the employer, then you're an employee. Story after story of Uber drivers living out of their car, homeless, barely hanging on, and meanwhile these companies just went public and their CEOs are billionaires."
The bill includes an ABC test that businesses can use to decipher a worker's "independent status:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
(B) that the worker performs work that is outside the usual course of the hiring entity's business
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Classifying the gig worker as an independent contractor instead of an employee saves the companies money and avoids state and federal labor laws. Under this new law, if it passes, the worker will have the right to minimum wage, workers' compensation, unemployment insurance, paid family leave, and sick days. They will even be able to unionize.
Barclays and Macquarie estimated that the companies will spend an extra $2,000 to $3,600 per driver annually.
This bill comes at a terrible time for Uber, who just laid off 435 workers and is struggling to turn a profit. During the company's second-quarter earnings call, CEO Dara Khosrowshahi didn't treat the AB5 as a dire situation.
"It doesn't immediately transform drivers into employees. It just changes kind of the legal test in the court," Khosrowshahi said.
Lyft executives agreed on this point, as well as the fact that the bill would harm the drivers' flexibility.
"You would hurt the majority of the drivers that are doing this on a more supplemental income basis and don't want to work shifts," John Zimmer, Lyft co-founder said. "You have the rigidity of an employment model where it's helpful for a marketplace to have more flexibility on the hours people drive and the time of day and the size of the workforce given how fast we're growing."
Uber and Lyft have been encouraging their drivers to protest this bill in order for them to keep their flexibility–a value that attracts many drivers to this type of work. Khosrowshahi believes there's a way to compromise, for drivers to keep their independent status while still adding some new protections.
When 1,100 rideshare drivers were asked in 2018 what type of employment relationship they'd like to have with their rideshare company, over 75% of them said "independent contractor," while 21% answered "employee" and 3% didn't know the difference.
A large number of rideshare drivers only work 10-20 hours a week, so it's clear why they'd want to keep their flexibility.
However, the smaller percentage that works 30-40 hours per week are the drivers that want to be treated as employees. In May, there was a worldwide Uber strike in response to Uber's bottom-line boosting pay-cuts. Uber would be going public soon, and the workers knew that their payment was suffering because of it.
For customers, the prices for an Uber or Lyft ride could rise. With Uber and Lyft having to schedule drivers' work hours in advance (an additional labor cost), they may not schedule drivers for slow times. The supply of needed drivers may decrease due to this shift, and the customers may pay more because of it.
Lyft, which operates only in North America, could be more dependent on the California market. But Zimmer acknowledges that if the bill passes into law, Lyft would hire fewer drivers, which would save from having to do background checks and onboarding.
The bill, which passed the state Senate on a 29-11 vote, now heads into the state assembly where amendments will be voted on and finalized. Governor Gavin Newsom's signature is required for the bill to become law, and based on an op-ed piece he wrote in the Sacramento Bee on Labor Day, his signature is likely.
"Employers shirk responsibility to safety net programs like workers' compensation and unemployment insurance. Taxpayers are left to foot the bill Reversing the trend of misclassification is a necessary and important step to improve the lives of working people," wrote Newsom.
Image Sourced from Pixabay
See more from Benzinga
- Ocean Rate Report: Jitters For Bulkers, Steady For Boxes
- Sticks And Carrots Drive Heavy-Duty Electric Truck Adoption
- Today's Pickup: Idaho Prosecutor Drops Drug Trafficking Charges Against Truck Driver Hauling Hemp
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.