The future of work

The economy of 2019 is a paradox. Unemployment, which stands at 3.7%, is historically low. Gross Domestic Product is growing steadily. This should result in substantially higher compensation for workers. But that is not happening. Real median household income hasn't budged under Trump. 

But this is not just a Republican problem. Real median household income has remained the same for the last twenty years, through Democratic and Republican administrations. 

So what explains this? How do we have a growing economy and a tight labor market, but workers seeing little, if any, improvement in their financial condition?

One reason is that companies are creating jobs that disempower workers and deny them basic protections and benefits. This is called "the gig economy."

On Wednesday, California took a step to level the playing field. Governor Gavin Newsom (D) signed AB5, a bill intended to force companies like to stop misclassifying their employees as "independent contractors." 

"The hollowing out of our middle-class has been 40 years in the making, and the need to create lasting economic security for our workforce demands action," Newsom wrote in a letter explaining his decision to sign AB5 into law.

Under the law, which goes into effect next year, ride-share drivers and other gig workers would be "entitled to benefits such as minimum wage, workers’ compensation, unemployment insurance, expense reimbursement, paid sick leave and paid family leave." 

It's a small step, but one that companies like Uber, Lyft, and DoorDash find intolerable. They intend to do anything and everything possible to derail the law. 

How the new law works

In one sense, AB5 doesn't change anything. Last year, the California Supreme Court, in a case called Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex), said employers could only classify workers as independent contractors if three conditions were met

A. The worker is free from the control and direction of the hirer in connection with the performance of the work.

B. That the worker performs work that is outside the usual course of the hiring entity’s business; and

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.

This is known as the "ABC test." Under this ruling, before AB5 was even passed, drivers for Uber appear to be employees, not independent contractors. 

A. Uber drivers are controlled by Uber. The company, not the driver, sets the prices. The company establishes other essential requirements, like what kind of car can be used by the drivers. 

B. Uber's usual course of business is giving people rides, which is exactly the work that Uber drivers perform.

C. Uber drivers do not generally have an independent driving business. They drive for Uber. 

So Uber drivers fail not just one, but all three requirements to be independent contractors under this ruling by the California Supreme Court. 

So what does AB5 do? It codifies the Dynamex ruling and gives it teeth. Notably, it "empowers the attorney general, city attorneys in large cities, and local prosecutors to sue companies over violations." The city attorneys in Los Angeles and San Francisco have indicated they are ready to act. 

It also carves out some exemptions for high-paying professions like doctors, psychologists, dentists, and engineers. Ride-share companies like Uber and Lyft lobbied hard for an exemption but didn't get one. 

Uber and Lyft have just begun to fight

Uber and Lyft view AB5 as an existential threat to their companies. According to Barclays, "reclassifying workers could cost Uber and Lyft an additional $3,625 per driver in California." That's about a 30% increase in the companies' labor costs. This is bad news for companies that are already hemorrhaging money. Last quarter, Uber lost $5.2 billion, and Lyft lost $650 million. And while AB5 applies only in California, it could quickly be duplicated in other states.

Still, early investors have made billions off of Uber and Lyft from their successful IPOs. They are getting richer off a business model that stiffs workers and the government. 

Uber and Lyft, which lobbied ferociously against AB5, don't plan on complying with the law. Rather, the companies claim that driving people places is not a core part of their business. This is not a joke. Tony West, Uber’s Chief Legal Officer, held a conference call on the subject:

That legal test, called the “ABC test,” certainly sets a higher bar for companies to demonstrate that independent workers are indeed independent. Under that three-part test, arguably the highest bar is that a company must prove that contractors are doing work “outside the usual course” of its business.

But just because the test is hard does not mean we will not be able to pass it. In fact, 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.

While West cites "rulings" that support his contention, these are not, as you might expect, court cases. Rather, he provided twodecisions by private arbitrators, who are notoriously deferential to corporations, and one bulletin by the Vermont Department of Labor. None of these would be persuasive authorities in a Calfornia court. 

Instead of complying with the law voluntarily, they will force the issue to be litigated in court. Even if Uber and Lyft lose, which seems very likely, it will buy them additional time. A lawsuit could take years to resolve. 

The first plan is to get the legislature to accept some concessions by the companies to drivers in exchange for an exemption to AB5. Uber "has suggested an earnings floor of 1.27 times minimum wage (calculated as a weekly average), plus 30 cents a mile for expenses." That doesn't sound great, but it's actually worse. Uber's proposal -- and a similar one by Lyft -- would exclude the time drivers wait for rides, which could reduce their effective floor below the minimum wage. 

If that doesn't work, Uber, Lyft, and DoorDash have pledged $30 million each to fund a ballot initiative granting them exemptions to AB5 that would appear on the ballot in November 2020. 

Newsom isn't done either

In his letter, Newsom said that AB5 was just the first step. Next, Newsom wants to give gig workers the right to "form a union, collectively bargain to earn more, and have a stronger voice at work." Newsom said he will "convene leaders from the legislature, the labor movement, and the business community to support innovation and a more inclusive economy by stepping in where the federal government has fallen short and granting workers excluded from the National Labor Relations Act the right to organize and collectively bargain."

Uber and Lyft are trying to head this off as well by "forming a new driver association, in partnership with state lawmakers and labor groups, to represent drivers’ interests and administer the sorts of benefits that meet their highly individual needs." This has been derided as an effort to derail actual unionization and a throwback to the (now illegal) "company unions" of the 1920s.


Thanks for reading!