Labour Laws versus the Gig Economy

California law threatens freelance-worker business models

On Tuesday, in a landmark vote, the California Senate passed Assembly Bill 5, a rule that could force giants in the so-called gig economy such as Uber and Lyft to reclassify their independent contractors as employees. Such a change would afford protection for thousands of employees of these companies, which include ride-hailing apps and food-delivery services, spread across the state.

The vote could deal a significant blow to companies that built multibillion-dollar businesses on the back of independent contractors willing to work without any or limited benefits often given to company employees. California, the most populous state in the US, could be setting a trend in establishing policies that are adopted by other states.

The bill would codify a decision in 2018 by the Supreme Court of California that set out a new standard for determining whether workers are properly classified as independent contractors. In that ruling, the court had said workers are a company’s employees under state wage laws when the company exercises control over their work, or when they’re deemed integral to its business.

Gig-type work has been under the spotlight for several years now as companies such as Uber, Lyft and DoorDash in the US have grown into giants, even as the contractors they rely on didn’t receive the benefits or minimum pay guaranteed to employees. Major gig-economy companies have grown into major entities in other countries, with Didi Chuxing in China and Ola in India as examples.

Many of the companies affected have fought back efforts to classify their workers as employees, settling class-action lawsuits from drivers and securing exemptions from rules that might have threatened the drivers’ freelancer status.

With the passage of the bill, Uber and Lyft, businesses that are struggling to prove their worth — Uber reported a $5 billion loss in the most recent quarter — are likely be required to pay millions more in payroll taxes, workers’ compensation, and training costs for employees, in addition to higher wages once workers are protected by minimum wage laws.

The bill has yet to receive approval from the senate, although this is now considered a mere formality. After it’s signed into law by Governor Gavin Newsom, it will go into effect on 1 January 2020. However, companies like Uber, Lyft and DoorDash aren’t done fighting yet: they’ve pledged to spend $90 million to support a ballot initiative that would essentially exempt them from the legislation.

In the UK, Uber has appealed a decision by a labour tribunal that drivers must be classified as workers entitled to minimum wage and annual leave. The country’s Supreme Court is expected to hear arguments in the case in 2020.

The passage of Assembly Bill 5 shows that such legislation is politically viable. In California, the bill could act as a road map for other states to pass their own legislation to rein in the gig economy.