Is the Jig Up for the Gig Economy?

September 20, 2019

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The fight is on to define what being an employee means for more than a million people in California, with consequences that reach far beyond.

Disruptive business models are being disrupted. This time by the law of the land.

Companies like Uber and Lyft owe much of their success to the cost savings reaped by employing large contract workforces. That will change now that a landmark bill has been signed into law by California’s governor. Assembly Bill 5 (AB 5) will require Uber, Lyft, DoorDash and many others who use contractors, or “gig” workers, to be reclassified as employees. Now is the time for companies who employ contract workers and those who count them among their partners and vendors to examine how the new law will impact their business and relationships with employees.

The bill becomes law on Jan. 1, 2020, and extends traditional employment protections to contract workers, such as a minimum wage, health care, workers’ compensation and unemployment benefits. It not only covers rideshare drivers but will also reclassify more than 1 million workers in California, including construction workers, franchise owners, delivery drivers, nail salon employees, custodians, newspaper couriers and more.

Industry experts estimate that relying on employees rather than gig workers will raise operating costs by 20 to 30 percent. For Uber and Lyft, it is estimated that reclassification will add costs of around $800 million combined, or an average of $3,625 per driver in California alone. In addition to the costs associated with compliance, it could force Uber and Lyft to shift their business models entirely, such as requiring their drivers to work in shifts rather than allowing them to decide when to work.

AB 5 systematizes a 2018 California Supreme Court ruling that created a three-part test for determining if a worker is a contractor or employee. According to the test, a worker must be performing work that is “outside the usual course” of the company’s business, and the worker is only considered a contractor if they are not under the direction or control of the company while working. Uber has argued that drivers do not qualify as employees, asserting that “several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”

With the signing of the legislation on Sept. 19, 2019, parties on both sides are ready for a fight as the move by California will reignite efforts by other states that have attempted to pass similar legislation and failed, including New York, Washington and Oregon. Multiple efforts are under way by Uber and Lyft to fight the measure or lessen its effects. Both companies, along with DoorDash, announced they would commit $90 million toward a California ballot measure that establishes a third class of worker between employee and independent contractor. Labor unions have already lauded the measure as a win for workers’ rights, and it is expected they will look for ways to organize multiple new workforces as early as January 2020.

As the situation evolves, a few issue areas are worth monitoring:

  • Increased shareholder pressure: Both Uber and Lyft are public but not yet turning profits. Shareholders could pressure both companies to reshape their business models and chart faster, more aggressive paths to profitability.
  • Fewer IPOs, more M&A: Increased costs for startups and private companies may mean fewer will choose to go public. Costs may also spur consolidation in some industries for companies to survive.
  • Uptick in collective bargaining: Both Uber and Lyft drivers have held strikes in the past, and AB 5 does not mention workers’ right to collectively bargain, leaving the door open for labor unions to attempt to unionize newly minted employees.
  • Accelerated pace of innovation: Companies may speed up the pace of innovation in order to reduce human capital costs. Both Uber and Lyft could more aggressively pursue autonomous vehicle deployment, and other gig companies may look for ways to better automate processes in order to reduce or remove the need for humans.
  • Risk of ongoing litigation: Companies will be faced with a decision: whether to comply preemptively with the legislation or face potential litigation from workers or other state officials.

The effects of AB 5 and related legislation in other states will reshape gig companies and greatly impact adjacent and related industries. Understanding where one’s organization sits in terms of risk potential will be imperative over the next several months as the details of the law take shape and policies are shaped. Asking the right questions is a great place to start:

  • What does your contractor or contingent workforce look like? Are they an essential function of your business?
  • What is this workforce’s current perception of its relationship with the company? What does the contingent/contract workforce value about their status? Not value? What are their perceptions about the potential change in status?
  • Has there been any past or recent activism from the contingent/contract workforce? How did that manifest, and how was it resolved?
  • What channels of communications exist already with this aspect of your workforce? Have they been activated with enough frequency to be a reliable channel of communication? If not, have you assessed how communication channels need to change?
  • If your workforce is not unionized, have you examined your policies and risk potential for collective bargaining?
  • What is your relationship with gig companies? Do you count them among your customers, vendors or partners?
  • What benefits do you currently offer to part-time employees? What will change or stay the same if this law (or similar) is enacted?

Even if a company has no substantial operations in California and is not considered a gig economy employer, the implications of the law may quickly inform legislative activity in other states. From the birthplace of disruption comes the birthplace of new legislation. It’s a good time for companies – and teams from HR, communications and policy – to huddle up to prepare for the next wave.