California just dropped a bomb on the gig economy — what’s next?

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California just grievously wounded the gig economy.

But Assembly Bill 5, the California bill that was approved by the state Senate on September 10th and signed into law on September 18th, is only the beginning of a long fight over the relationship between gig companies like Uber and Lyft and the drivers they employ.

Uber and Lyft will try to staunch the bleeding by doing what they do best: spending obscene amounts of money. The companies say they will fund a ballot initiative in 2020 to ask voters to approve the creation of a new category for ride-hail drivers. The enforcement of the law will present a range of obstacles for state regulators. And drivers will still face tough hurdles before they can achieve their ultimate goal: the formation of an independent union.

Still, it’s a stunning blow to Uber and Lyft, especially given their past success at manipulating states to pass laws strengthening their ability to classify workers as contractors. Over the past five years or so, lobbyists with ties to Uber and other gig economy companies have convinced lawmakers in more than two dozen states to pass laws that classify drivers as contractors.

But that was when Uber and Lyft were at their apex, flush with cash and riding a wave of optimism about Silicon Valley’s ability to change the world. Since then, perceptions have shifted. Now Uber is known as an unethical company of tech bros who mistreat drivers, as well as their own employees. Since going public, both Uber and Lyft have seen their stock prices slip as they struggle to convince investors they can stop burning so much cash on incentives for drivers and riders, and ultimately earn a profit. The amount of money they’re losing may already be unsustainable, experts say — and that’s before shelling out extra money for employees.

AB5 in California enshrines the so-called “ABC test” for determining whether someone is a contractor or employee. Some form of an ABC test is already law in many states, including Massachusetts, Virginia, and New Jersey. In those states, Uber and Lyft drivers should be considered employees, but the companies have all but shut down private enforcement through forced arbitration agreements, said Catherine Ruckelshaus, general counsel of the National Employment Law Project.

“If there’s no enforcement,” Ruckelshaus said, “it’s not going to fundamentally change these business structures.”

The fight over gig work could soon spread to other states. New York Governor Andrew Cuomo recently told reporters that the California proposal got his “competitive juices flowing” and expressed an interest in seeing a proposal in his own state that steers more workers away from independent contractor status, according to Crain’s.

He’ll have help, too. A coalition of progressive groups and labor unions are coming together in the Empire State to push a new standard for gig economy workers. “These workers are exploited every single day,” Alison Hirsh, the political director at 32BJ, one of the coalition members, told Politico. “They are treated incredibly poorly. Their income is not reliable. Their health and welfare standards are incredibly low. They’re at the whim of these companies that dictate the terms of their work.” This type of coalition was crucial in getting AB5 passed in California; a similar effort seems all but inevitable in New York.

Photo by James Bareham / The Verge

Supporters say Uber and Lyft face an uphill battle if they can’t find a way to marshal a significant opposition.

“A domino effect [is] not just possible, it’s all but guaranteed,” said Bradley Tusk, an early Uber investor and advisor, and president of Tusk Ventures, a venture capital and political strategy firm. “And if the sharing-economy companies can’t radically reframe the narrative from ‘evil Silicon Valley powerhouse vs workers’ to ‘what this actually means for workers and consumers vs groups looking to profit from the changes,’ they’ll keep losing everywhere.”

Uber and Lyft are already under significant pressure in its largest market, New York City. The city recently passed rules establishing a minimum wage for drivers, which also forces them to spend less time roaming the streets looking for fares. It also re-upped its moratorium on new for-hire vehicle licenses, meaning Uber and Lyft are restricted to their existing vehicle fleet sizes. This doesn’t apply broadly to other gig economy workers, though.

After New York City’s Taxi and Limousine Commission approved the new wage rates, ride-hail companies started to limit the times when drivers could log on, and reduced incentive-based pay premiums. TLC officials testified this week that the vehicle cap and wage rules have not significantly affected wait times for riders. This could provide some sense for how companies will adapt to new regulations in other states: fewer drivers on the road, higher fares, but more or less the same level of service.

Fighting a bicoastal war may be unsustainable for the unprofitable ride-hailing companies. Uber and Lyft have already said they will jointly spend $60 million on the ballot initiative in California. They view that as a necessary cost to preserve their business model and spare themselves even higher costs down the road. Experts estimate that a workforce of employees costs companies 20 to 30 percent more than a workforce of contractors — which translates to hundreds of millions of dollars per year to Uber and Lyft.

Uber is already in a cost-trimming phase, one that could accelerate given the outcome of AB5. The company has laid off over 800 employees from its engineering, product, and marketing divisions in recent months. Rising prices may help offset those costs, but could make Uber and Lyft less inviting options for riders.

Drivers still face a tough road ahead. They are bound by arbitration clauses that force them to take up their labor and employment complaints behind closed doors and prohibit them from joining class action lawsuits. Federal preemption rules prevent drivers and other gig economy workers from forming unions, because under federal law, they are still considered contractors.

AB5 could be a tipping point. The experience of driving for a ride-hail app, or even using one as a transportation-seeking customer, seems poised to change forever. The era of cheap rides in cities, propped up by massive venture capital-backed subsidies, may have been too good to last.

Or perhaps it was never that good to begin with. Uber and Lyft decimated the yellow taxi industry, sending medallion prices plummeting, and many drivers into deep debt. Some drivers were so despairing they took their own lives. Meanwhile, traffic congestion soared in cities, much of it attributable to the popularity of ride-hailing. The backlash against tech companies like Uber and Lyft seems in line with similar reckonings for Apple, Facebook, Amazon, and Google.

“AB5 is riding two waves: a longstanding effort to restore workplace protections to misclassified workers, and it comes on the heels of the techlash,” said Alex Rosenblat, a technology ethnographer and author of Uberland: How Algorithms are Rewriting the Rules of Work.

Rosenblat argues that while the California bill is about more than just Uber and Lyft, those drivers became the face of all workers exploited by giant tech companies. “That’s why AB5 is a symbolic and remarkable shift towards accountability, in labor and in tech,” she said.

Drivers still face enormous hurdles. If they try to collectively bargain over their wages, they may run afoul of antitrust laws that prohibit price-fixing among small, independent businesses. “There are opportunities for California to then pass more aggressive pro-labor laws that would permit gig economy workers to unionize,” Rosenblat said, “which suggests that AB5 is the first step in an ongoing battle over the future of workers.”

Update, September 18th at 5:03PM ET: Added that California governor Gavin Newsom has signed AB5 into law, as expected.

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