On Wednesday, Uber and Lyft released a new petition against Assembly Bill 5, the California bill about to be debated in the Senate that, if passed, would almost certainly result in gig economy workers being designated as employees in the state rather than independent contractors. Uber and Lyft fear AB5 could tank their business. They’re right to be afraid.
The petition includes a series of lame offers from the ridehail companies that ring hollow to anyone familiar with their business. Moreover, it only underscores the need for AB5 to apply to rideshare drivers, because it demonstrates Uber and Lyft still don’t get the problem that is trying to be solved, that of their incongruous existence.
AB5 would suck Uber, Lyft, and other gig economy platforms out of their legal vacuum and into well-defined orbits of labor law. It would be doing so in a way that tracks with the reality of their businesses and a common-sense definition of what an “employee” is. This, the companies contend, would be unacceptable, so they’re fighting it like hell.
The rideshare companies are now offering to ensure drivers would “earn a minimum of approximately $21 per hour while on a trip, including the costs of their average expenses.” This is very much not a minimum wage of $21 per hour, as it’s been widely framed by the media, because it only applies “while on a trip,” and drivers typically spend 40 to 60 percent of their time the app is open either waiting for their next fare or in transit to it.
So, this is in fact a minimum wage proposal of about $11 per hour—below the state’s minimum wage of $12 per hour for companies with more than 25 employees—notwithstanding details of how average expenses are calculated.
In addition, the companies propose “robust new benefits such as paid time off, sick leave, and compensation if they are injured while driving.” Notably absent is medical insurance, as well as whether these benefits will be given to workers or offered at a cost.
They also promise to empower drivers “to have a collective voice with rideshare companies, and the ability to influence decisions about their work.”
This is similar to the driver associations both companies have previously advocated for and the controversial Independent Drivers Guild in New York City that receives money from Uber, signed a no-strike clause as a condition of its existence, and refuses to address systemic problems within the rideshare companies.
Uber and Lyft have proposed this middle-ground solution not only because it requires minimal sacrifice on their parts, but because their entire business model, such as it is, relies on passing off as much of the cost to the drivers as possible: their time when they’re not transporting passengers (otherwise known as deadheading), the car, fuel, insurance, maintenance, etc. All despite the fact that Uber and Lyft’s businesses cannot function without those costs.
This is where AB5 comes in, which may be the biggest fight yet for the future of ridesharing. Specifically, AB5 is codifying into law a ruling from the California Supreme Court last year that established what’s known as the ABC test, one of the strictest standards for independent contractor designation, as the LA Times summarized:
To classify someone as an independent contractor, the court said, businesses must show that the worker is free from the control and direction of the employer; performs work that is outside the hirer’s core business; and customarily engages in “an independently established trade, occupation or business.”
Pretty much everyone, including Uber and Lyft, interpret this to mean gig economy workers would be classified as employees. This would pose an existential threat to their businesses. If drivers were made employees, Barclays analysts estimated, as reported by Quartz, it would cost Uber and Lyft $3,625 per driver in California, or hundreds of millions of dollars a year in addition to the billions of dollars a year they already lose.
Further, if AB5 passed, it would mean Los Angeles and San Francisco, two of the country’s largest ride-hailing markets, would join New York City in clamping down on the industry. Earlier this month, New York City renewed its vehicle cap and minimum wage laws. Should other cities or states follow with similar laws, it’s difficult to see how Uber and Lyft could go on in similar form.
Both opponents and supporters of AB5 acknowledge it would have a profound impact on the ridehailing industry and other gig economy-based companies. What they fundamentally disagree on is whether or not that is a good thing.
One side sees this as very much the point of the legislation to correct the equally profound misclasification of gig workers. Back in July when AB5 passed the Assembly, Samantha Gallegos, a spokesperson for Rep. Gonzalez, told our pals at Gizmodo gig economy companies “are likely already misclassifying their workers under the Dynamex decision [the Supreme Court case ruled in 2018 that established the validity of the ABC test]. Assembly Bill 5 will codify this decision and bring clarity to those professions and industries in which workers actually do operate as independent contractors.”
Opponents of AB5, such as Uber, Lyft, and gig economy delivery startup Doordash, contend it is, in effect, government overreach stifling innovative businesses that are just trying to make the world a better place, and therefore AB5 should offer that clarity by exempting gig workers from the new classification.
As this debate heated up anew, 75 professors from leading American universities signed a letter urging Governor Gavin Newsom and the leaders of the legislature to adopt AB5 as written without any carve-outs for so-called “gig economy” workers.
“We oppose attempts to carve platform gig workers out of Dynamex and AB5,” the letter states in no uncertain terms. “App-based workers, as many of us have found through our research, are algorithmically controlled in the traditional ways that employees are controlled. They have very limited—if any—entrepreneurial potential; their hours and work are highly structured by the platform employer; they can be unilaterally terminated from their work; and most do not set their own prices.”
Indeed, the letter from some of America’s leading experts underscores that AB5 is clarifying how existing rules in a post-Dynamex landscape ought to be applied, as ruled by the California Supreme Court. This, they contend, is a clarification needed now more than ever precisely because of the gig economy’s intentional misclassification of millions of American workers as independent contractors. This misclassification exempts those workers from the very protections employees have won through centuries of labor law developments.
Uber and Lyft are lamenting the existential threat to their business such a clarification to the very labor laws they’ve long undermined would present. And now, after years of cutting driver pay, instituting new, onerous work rules, and failing to meaningfully address this fundamental paradox at the core of their business, they are deeply concerned that should AB5 survive, their business may not.
They are so concerned about this, in fact, that Lyft, Uber, and Doordash have announced a $90 million slush fund to launch a voter referendum in California to exempt gig economy workers from AB5, should it pass. That $90 million could have gone an awful long way towards addressing the needs of homeless Uber and Lyft drivers, to say nothing of the ones with roofs over their heads still struggling to make end’s meet. But, the companies have decided that money is better spent fighting AB5 to the very death.
Uber and lyft have hung their legal hat on the idea that drivers are not workers because they have flexibility. This has never been the criteria on which courts have ruled if workers are employees.
“Speak with drivers,” an op-ed co-written by Uber CEO Dara Khosrowshahi and Lyft co-founders Logan Green and John Zimmer asserted, “and they will tell you they are attracted to the work because of the flexibility it affords. Very few jobs allow you to start or stop working whenever, wherever, as often as you want.” This, the companies argue, is what’s worth preserving, and AB5 would kill that flexibility.
It is undoubtedly true that most drivers value the flexibility of ridesharing, although such an observation glosses over the myriad ways Uber and Lyft undermine that flexibility by cutting rates, gamifying their platform, and otherwise incentivizing drivers to work certain times or drive a certain amount to the degree that it’s unprofitable to do otherwise.
While reporting our recent investigation into driver pay, many drivers told us they no longer feel like their jobs are all that flexible. Sure, they can log on or off whenever they want, but constant pay cuts mean they have financial pressures to stay logged on longer than they used to. It also means pressure to stay on at times when it is barely profitable to do so. And that’s leaving out gamified but much-needed bonuses or mysterious “timeouts.”
Nevertheless, the only ones who are in fact threatening to end that flexibility are not California lawmakers, but Uber and Lyft. Nothing in AB5 requires employees to work fixed hours, according to Wayne State University law professor Sanjukta Paul, who was one of the signatories of the letter supporting AB5 applying to gig workers. “Employers and employees are free to come up with whatever hours arrangement is mutually agreeable,” Paul wrote in an email. “Maybe [Uber’s] argument is that it wouldn’t make business sense for them, but that’s a different point than just pointing to the law.”
Indeed, this is very much their argument, and the central point of contention at the heart of AB5. The petition echoes much of the rhetoric since the AB5 fight began by stating that “Forcing all drivers to become employees could drastically change the rideshare experience as you’ve come to know it, and would limit Uber’s ability to connect you with the dependable rides you’ve come to expect.”
Fundamentally, Uber and Lyft are saying if they internalized all the costs of their business, they could not run this business as it’s currently run.
Uber makes this very argument in their own S-1 filing prior to going public:
Changes to foreign, state, and local laws governing the definition or classification of independent contractors, or judicial decisions regarding independent contractor classification, could require classification of Drivers as employees (or workers or quasi-employees where those statuses exist). Examples of recent judicial decisions relating to independent contractor classification include the California Supreme Court’s recent decision in Dynamex Operations West, Inc. v. Superior Court.
“Our business would be adversely affected,” the S-1 continued, “if Drivers were classified as employees instead of independent contractors.”
It’s worth taking a moment to reflect on what an utterly bizarre argument this is for a company to make. Should this be any other business—a clothing store, a coffee shop, a food cart, an auto parts supplier—one would struggle to see the dilemma. This would be, quite simply, a bad business that loses lots of money. It would go under. There would no quandary. Just capitalism, baby.
Or, to take a more modest forecast, Uber and Lyft threaten that, at the very least, wait times would get longer and rides more expensive. This is an indirect appeal to the positive externalities their venture capital-subsidized taxi rides produce. These rides, the companies are saying, provide services for the public and we’d all be worse off should fewer members of the public have access to it.
This is awfully, awfully close to making the argument that Uber and Lyft are quasi-public goods that deserve some form of regulatory protection to continue to offer such cheap rides.
Not only is this a deeply ironic argument for the fiercely capitalist Silicon Valley darlings to be making, but it is deeply unconvincing. I rely on any number of private companies, including my local grocery store, to live my life, but that doesn’t give them the right to call their cashiers independent contractors to save money.
But on an even deeper level, Uber and Lyft are trying to have it both ways. Public goods are even more regulated and controlled by government than private companies. Should we grant the premise and acknowledge Uber and Lyft provide a public service so critical to civic life it cannot be narrowed, AB5 would be just the tip of the iceberg of worries bearing down upon Uber and Lyft’s path to profitability.
Even though Uber and Lyft have achieved massive scale by growing faster than their balance sheet would otherwise allow—thanks to artificially low prices due to massive investments from rich people that allow both companies to constantly operate at a loss—that doesn’t entitle them to a right to bend labor laws to fit their business models. Nor does it grant them exemptions from the definition of what an “employee” is.
Indeed, when you get right down to it, Uber and Lyft are arguing that they have a right to exist as they currently do, and any efforts to undermine that right to exist are fundamentally and obviously wrong. But once that presumption of existence is done away with, it is very difficult to see why Uber and Lyft should be protected from their own follies.
Uber, and later Lyft, purposefully exploited long-standing gaps in labor and antitrust law to form a company, attract investors, go public, and get rich. Perhaps their exploitation of those gaps in law are no more egregious in the particulars than what businesses have done for decades, but they intentionally did so on a grand, aggressive scale to attract more investors and get even richer. That scale, in turn, invited increased scrutiny and upped the potential for regulatory blowback.
And when that model does get challenged, it is defended in the most nonsensical of ways. By cobbling together several different and often contradictory arguments in labor law, the companies have played whack-a-mole with any court challenges that arise, and smacked many of them down without arguing the merits of the case. Instead, they force proceedings out of the court system and into civil arbitration, avoiding the creation of any legal precedent that might harm their long-term prospects.
The Uber and Lyft pretzel logic is as follows: Drivers are their customers and also independent contractors but cannot negotiate prices or any terms of their contract. Uber and Lyft are platforms, not transportation companies. Drivers unionizing would be price-fixing, but Uber and Lyft can price-fix all they want. Riders pay the driver for their transportation, not the platforms, even though the platforms are the ones that set the prices and collect the money and allocate it however they want, often such that the driver does not in fact receive much of the rider’s fare.
If you think that last paragraph was aggressively confusing, it is. Uber and Lyft lack a coherent story for what they are. It is an amalgam of legal necessities in order to reach the only conclusion that keeps them in business: drivers are not employees, they are not a transportation company.
AB5 seeks to clean up the independent contractor mess that Uber and Lyft have exploited. Insofar as it is not a perfect piece of legislation, and to any extent Uber and Lyft feel it reaches too far into their core business, they have no one to blame but themselves. They had ample opportunity to rationalize their company’s labor force. They have not only failed to do so, but have fought every effort tooth-and-nail. As a result, not only have gig economy companies forfeited any claim they can fix the problem themselves with well-intentioned policy changes, but they should be given no regulatory bailout from the mess they have made.
There is a version of Uber and Lyft that might be profitable even if drivers are employees, but it is a much humbler one. It is one that uses the genuine efficiencies of app-based taxi hailing—the very ones Uber and Lyft claim is their actual secret sauce other than widespread worker exploitation—to get a smaller number of drivers more customers for each of them.
To be sure, It is likely a low-margin business, one that carefully evaluates markets before exploding into them. It doesn’t provide 14 million trips a day on six continents or “ignite opportunity by setting the world in motion.” It is probably not a $50 billion company. But it is one that pays its workers fairly.