Update: Uber and Lyft Forced to Consider Franchise Model, Putting Jobs at Risk

Lyft and Uber drivers in California are nervously awaiting the outcome of another stand-off between their employers and the California

Lyft and Uber drivers in California are nervously awaiting the outcome of another stand-off between their employers and the California legislature. A new law requiring the ride-share companies to employ their drivers as full employees, rather than independent contractors, has Lyft and Uber standing their ground and hoping to strong-arm the legislature into exempting their business model on the grounds that it’s a technology platform, not transportation. 

What is the CA AB-5 bill intended to address?

In 2019, the California state Assembly passed a bill known as AB-5, or the “Gig economy bill.” A gig economy is defined by Investopedia in three key ways: 

  • “The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform.
  • The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles.
  • At the same time, the gig economy can have downsides due to the erosion of traditional economic relationships between workers, businesses, and clients.”

Critics of a gig economy say that it doesn’t provide enough protections for workers, or establish adequate worker’s rights. Supporters say it offers flexible work opportunities for people looking to make quick cash and set their own schedules.

California enters the debate

California lawmakers have weighed in on the debate, in the form of a bill intended to address the system and provide more rights for workers. But will it actually benefit those currently working? The answer is complicated.

The bill would force Lyft and Uber to hire their independent contractors as regular employees. This would provide the employees with all the legal protections and benefits they’re entitled to, but it comes with certain costs that both workers and the companies have to consider.

One of the benefits of gig employment is that companies aren’t paying benefits like health insurance and social security for their workers. Which means that they can often provide their services for cheaper than those employing regular W-2 employees. As independent contractors, employees have a lot of freedom over their own work. They control their schedules for the most part, and can often work gig jobs part time and during free time as an extra and easy way to make cash. Services like Door Dash, Uber Eats, and Lyft are easy to be employed with and can provide quick and convenient cash opportunities that appeals to a lot of different workers. Independent contractors can switch between jobs more easily than regular employees, and have a lot of flexibility as to how they provide services within a company’s basic rules. 

On the downside, because the companies aren’t paying for benefits, the employees have to purchase their own or go without. Employees are responsible for their own taxes, and have to buy their own insurance which is often more expensive without employer input. Companies employing freelancers are not required to adhere to minimum wage or paid leave. They also have less job security than regular employees, and are easily replaced.

So why does the state Assembly want to regulate gig jobs?

There are several reasons why the California state Assembly is looking to rein in companies like Uber and Lyft. One of the thing that these companies have done in big cities is to edge out personal transportation services like taxis. They provide less stability for local economies than traditional employers. But more importantly, they circumvent labor laws that are designed to protect workers.

And companies often misrepresent the status of their employees as a way to skirt financial obligations to workers, taxes, and labor laws. The Deputy Inspector General to the Treasury wrote in a 2009 memo about this practice, “IRS research indicates that employers often misclassify workers as independent contractors for various reasons.  They might do so unintentionally because of a lack of knowledge or because of poor advice received. Some employers might have Section 530 protection and, as a result, can legally treat workers as independent contractors who would otherwise be employees.  Finally, there are employers who deliberately misclassify workers to cut costs and to gain a greater competitive edge.  These employers avoid paying their share of employment taxes as well as other expenses such as workers’ compensation, unemployment insurance, and other benefits. Misclassifying employees as independent contractors and not incurring the related costs can give these employers a competitive advantage over employers who treat their workers as employees. The IRS’ interest in this issue is not to reclassify workers from independent contractors to employees.  Rather, it is to ensure that employers are making the proper determination and that workers are being treated appropriately.  The IRS has dedicated resources to educate taxpayers regarding employee classification as well as to enforce tax laws related to this issue.  Despite the many positive actions that the IRS has taken and plans to take to address the misclassification of employees as independent contractors, more needs to be done.”

In an attempt to address this and protect workers and local economies, the bill requires companies to apply three separate criteria to employees to determine if they are regular workers or can be considered independent contractors. In order to be considered an independent contractor:

  1. The worker must be free from the control and direction of the company in connection with the performance of the work.
  2. The worker performs work that is outside the usual course of the company’s business.
  3. The worker owns an independent business that does the same kind of work as the hiring company.

If an employee does meet these three vital criteria, the bill would require the company to employ them as a regular worker. 

Why is it such a big deal to shift independent contractors to regular employees?

Mostly, the answer to that is cost and logistics. Forcing the change would require the companies to completely restructure their base model, or to shift to a franchise model in which individual fleets of drivers. They have effectively employed this model in other countries. Not only would they have to pay nearly $300 million annually in worker’s benefits in California alone, but the ride-share companies would have to respect worker’s rights laws making it harder to fire employees and requiring respect for things such as leave time and paid vacation. All of these are minor inconveniences on a small scale, but when the entire state company structure has to re-align, they provide a logistics nightmare. People could be out of a job and ride-sharing could grind to a halt, in places where traditional transportation services have been completely edged out by ride-shares, for weeks or even months. The companies may be hesitant to re-hire their independent contractors as regular workers, spelling uncertainty for people who currently rely on their pay. And some workers who find this sort of employment easy to qualify for may not be eligible under stricter hiring regulations, putting their livelihood in jeopardy. 

The ride-share companies look for any way out

Uber and Lyft are fighting hard to be exempted from the AB-5 bill. They have tried arguing that their actual services are technology-based rather than transportation-based, as they provide services across a wide range of options but the standardized function comes from the ability to access the service online from their apps. 

They are also hoping to delay until voters have a chance to vote on Proposition 22 which would specifically exempt app-based drivers from the criteria requiring them to be regular employees. In order to buy time, Lyft and Uber have both filed appeals which were recently rejected by a California judge. 

Uber and Lyft fear what a loss would mean for their overall businesses

Whether or not Uber or Lyft will be forced to comply with the bill or find a way to be exempted, for now they will be fighting tooth and nail to avoid paying the piper. While some employees may celebrate the possibility of rights long denied them as ride-share app employees, the companies grimly look to the future and the likelihood that the California bill could establish precedent that would affect their business practices in other states. 


Update: Late Wednesday, a California judged issued a temporary stay on the injunction against Uber and Lyft.  The emergency stay grants an extension to Uber and Lyft while appeals are being considered, and allows the companies to maintain their current business model until appeals are settled. Arguments have been set for October 13th. The companies have until August 25th to write written consents, or the stay expires.