How CA’s New Labor Law Could Hit Uber and Lyft

Gig workers may finally be getting a break, at least in California.

This week, legislators in the country’s most populous state passed a law that stipulates many contractor workers in new economy jobs are actually employees of the companies they work for.

That means that all the Uber and Lyft drivers, Postmates and Grubhub delivery people, those who hustle you to and from the airport and bring groceries and dinners to your doorstep, eventually could be compensated like regular employees.

The ABCs of AB5

The law, called Assembly Bill 5, says contract workers must now pass something called the ABC test, in which employers must prove their employees are not central to the way they do business. Companies must also prove that their contractors are independently established in a trade or occupation that’s the same as the work they do for the company that hires them for contract work. The law is slated to go into effect on January 1, 2020.

What is a gig worker?

Gig workers staff the new economy of app-based, on-demand service businesses, including Lyft and Uber, Postmates, Grubhub, TaskRabbit, and Instacart, among others.  Gig workers are typically classified as contract workers who perform specific tasks for short periods of time, and they have usually lacked the protections and agreements that full time and salaried workers have with their employers. Many of the gig economy companies are based in California.

Generally, the legal argument of AB5 is that gig workers are not true freelance contractors, as their livelihood depends on the company that has hired them to do the contract work. Further, gig workers tend to be indirectly managed by the companies they work for, and much of the business model of a gig economy company depends on having access to a cheap and flexible contract workforce, among other things.

Drivers for rideshare companies in numerous cities, for example, have attempted to organize for higher wages and greater employee protections.

The U.S. Bureau of Labor Statistics estimates that as many as 6 million people may work in the gig economy. Uber, in its IPO filing, says it has nearly 1 million drivers on its platforms.

Why is this important?

Workers classified as contractors are not covered by a wide swath of employee laws, including minimum wage, unemployment, and disability insurance, sick leave and discrimination protections, according to sources.

Many new economy businesses, particularly those in the tech industry, depend on a steady stream of cheap contract workers to make their business run. Businesses say making contract workers employees could add as much as 30% to costs.

Both Lyft and Uber, for example, have said in their recent IPO filings with the SEC (here and here) that their business models would be threatened if its drivers were classified as employees, instead of contract workers. Both companies are likely to fight the new law in the coming months, according to reports.

Ripple effect

In addition to ride-share drivers and delivery workers, the law could apply to any contract worker in jobs as varied as construction, construction, healthcare, trucking, janitorial services, nail salons, adult entertainment, commercial fishing, and newspapers, according to the Los Angeles Times.

Will this affect me?

New regulations can be good for consumers and workers, ensuring safer products and fairer wages for workers, for example. If you’re a gig worker in California, for example, you’re likely to have new protections and rights under the law.

But they can also affect the growth prospects of some businesses, making it more expensive for them to operate. Lower growth might also affect the stock prices of public companies subject to the new law.