Uber and Lyft face an existential threat in California — and they’re losing

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On August 29th, Uber and Lyft released a dramatic, unexpected proposal as a last ditch effort to derail legislation in California that could potentially explode the ride-hailing industry. In their proposal, the companies promised to pay their drivers $21-an-hour (but only while on a trip), provide them with sick leave, and “empower” them to “have a collective voice” — a nod toward drivers forming a union.

The proposal “will both protect drivers’ ability to work on their own terms, while maintaining the reliable rideshare experience you’ve come to depend on,” the petition states. It will most likely fail.

State senators in California are poised to vote on Assembly Bill 5, which would make it more difficult for so-called gig economy companies to classify workers as independent contractors. If passed, the bill could force Uber and Lyft to designate drivers as employees, a move both companies admit could throw them in a tailspin into the unknown.

“Our business would be adversely affected if Drivers were classified as employees instead of independent contractors,” Uber wrote in its S-1 filing with the Securities and Exchange Commission earlier this year.

It’s a stunning turn of events: The state that oversaw the birth to Uber and Lyft and the gig economy they helped create is now scrambling to correct some of its worst effects. Drivers have long complained about poor pay, lack of protections, and an inability to band together to effect change. There have been stories about drivers sleeping in their cars because they can’t afford to live in the cities where they work, struggling to make ends meet, and feeling totally at the mercy of a faceless algorithm that dictates their every move. AB5 is meant to address these very real concerns.

It will also fundamentally change Uber and Lyft. Uber phrases it this way: the bill would “drastically change the rideshare experience as you’ve come to know it, and would limit Uber’s ability to connect you with the dependable rides you’ve come to expect.”

If this sounds like a dire prediction, it’s meant as such. Uber and Lyft are facing an existential threat in AB5. And they’re losing.

The companies have sent their high-priced lobbying teams to Sacramento to persuade Governor Gavin Newsom and lawmakers that AB5 will ruin their ability to do business in the state. But they have now “all but accepted that AB 5 will pass and the governor will sign it,” according to the Los Angeles Times.

This has been brewing for over a year now. In May 2018, the California Supreme Court decided in favor of workers for a document delivery company called Dynamex Operations West; those workers were seeking employment status. The drivers for the delivery service first brought their case over a decade ago, arguing that they were required to wear the company’s uniform and display its logo while providing their own vehicles and shouldering all of the costs associated with the deliveries. AB5 is meant to codify the Dynamex decision into law. And that’s what’s got Uber and Lyft feeling the pinch.

“Clearly they know they’re in a tough spot,” Assemblywoman Lorena Gonzalez (D-San Diego), the co-author of AB5, told The Verge. “They’re violating Dynamex as it is. They know AB5 is coming.”

Gonzalez said that she wants to stop the misclassification of workers. Her bill would require companies to use a legal standard called “the ABC test” when determining employment status:

A): The worker is “free from the control and direction” of the company that hired them while they perform their work.

(B): The worker is performing work that falls “outside the hiring entity’s usual course or type of business.”

(C): The worker has their own independent business or trade beyond the job for which they were hired.

Gonzalez warned against any last minute attempts by Uber and Lyft to present their own solutions to the problems. “These companies have been in existence for years now. And they’ve known that their drivers have these complaints and these problems, and they’ve done nothing to address it. And they’ve said many times that they were going to address it, and they haven’t.”

California businesses are in full panic over the bill. The state’s Chamber of Commerce and other business groups have been lobbying for changes, and have been urging lawmakers to consider a long list of exemptions.

As such, AB5 exempts a lengthy list of professions, primarily ones in which the practitioners set their own rates. These include construction contractors, business-to-business services, freelance writers, fine artists, grant writers, graphic designers and podiatrists. The carve-outs also include doctors, dentists, lawyers, architects, accountants, engineers, insurance agents, investment advisers, direct sellers, real estate agents, hairstylists, barbers, estheticians and electrologists.

But most of the attention has been on Uber and Lyft. After all, it’s hard to ignore a tale of startups that raked in billions by exploiting weak labor protections, only to be brought down by a galvanized labor movement. The bill is being pushed by major unions, including SEIU, the Teamsters, the United Food and Commercial Workers, and the California Labor Federation, which represents 2.1 million workers.

AB5 has also become a bit of a bellwether for the 2020 presidential race. Several top Democratic candidates, including Senators Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Bernie Sanders (I-VT), as well as South Bend Mayor Pete Buttigieg, have endorsed the bill. Buttigieg spoke at a rally in support of AB5 last week.

The bill passed the Senate Appropriations Committee last week. Now it will head to the full Senate floor, probably in September. Newsom, who has strong alliances with both labor and the tech sector and technology companies, is pushing the two sides to negotiate a deal.

Uber and Lyft can see the writing on the wall — and the companies are already plotting their next move. According to the LA Times, the ride-hailing companies say they will spend $60 million to fund a ballot measure in 2020 to create a new classification for drivers. Food delivery service DoorDash, another gig economy company that classifies its couriers as freelancers, says it will chip in $30 million. Uber and Lyft also support a separate bill to create a new designation for gig economy workers, but view the ballot initiative is portrayed as a “last resort,” according to the Times.

This desperate maneuver contrasts with the blasé attitude of Uber CEO Dara Khosrowshahi, who when asked about AB5 in an earnings call earlier this month. “If AB5 passes, it’ll simply be a qualification of existing law. It doesn’t immediately transform drivers into employees,” he said.

Investors are taking the same stance. “The immediate impact to Uber/Lyft will be more limited than currently feared,” Wedbush analyst Daniel Ives said in a note to investors. He argued the bill is so transformational, that its “implementation and enforcement will be challenging, likely delaying an immediate impact.”

Part of the problem has to do with President Donald Trump and his appointees to the National Labor Relations Board. Earlier this year, a federal labor lawyer in the Trump administration issued an opinion that ride-hail drivers are independent contractors, not employees.

The Department of Labor has also stated that gig workers like Uber drivers are contractors ineligible for minimum wages and overtime pay. A federal judge ruled basically the same way last year in what is said to be the first classification of Uber drivers under federal law. That means that even if AB5 passes into law, unions seeking to organize drivers will run into strong headwinds. Uber and Lyft could force organizing drivers to face a vote by the Trump-controlled National Labor Relations Board, which could undermine those efforts.

This has been brewing for years. Hundreds of Uber drivers went on strike ahead of the company’s much-anticipated IPO in May. Drivers said they want better working conditions and more transparency from Uber over wages and access to the platform. Uber’s stock price has fallen steadily since the IPO amid concerns over the company’s lack of profitability; Uber lost a staggering $5.2 billion in the second quarter of 2019, most of which attributable to one-time stock payouts.

There are some labor groups that represent drivers, but all of them lack the ability to collectively bargain with the companies over essential issues like pay scales, hours, and workers compensation. That could seriously hamper the most broadly hoped-for effects of the law: an empowered driver class forcing Uber and Lyft to come to the table to hammer out a collective bargaining agreement.

Still, California’s passage of AB5 could have a domino effect that inspires other states to codify their own ABC misclassification tests, said Shannon Liss-Riordan, an attorney who represented thousands of drivers in a class action suit against Uber. But it will run into strong resistance from Uber and Lyft, which have deep pockets to spend on lobbying and public relations campaigns.

“They will continue to pour money into their misinformation campaign to convince voters that their refusal to provide employment protections helps the workers,” said Liss-Riordan, who is now running for US Senate in Massachusetts. “What it does is allow them to shift all expenses and burdens of employment from themselves to the workers whose labor has made these companies what they are today.”

Uber and Lyft have long argued that drivers don’t want to be classified as employees, preferring the flexibility to set their own schedules and drive for multiple apps that comes with gig work. “Our drivers consistently tell us that the reason why they value Uber is they value their freedom,” Khosrowshahi said on the earnings call. “They’re their own boss. They run their own business.”

But Liss-Riordan argued that’s untrue. Uber and Lyft are trying to deceive their own workers into thinking that they would have to give up their flexibility if they win employment protections, she said. “Having represented thousands of gig workers over the last six-plus years, I know that is a lie.”

Michael Reich, professor of economics and co-chair of the Center on Wage and Employment Dynamics at the University of California at Berkeley, agrees. He notes that if drivers in California were reclassified as employees, their employers could provide them improved pay and benefits and full reimbursement for driving expenses, allow drivers to organize, while maintaining driver flexibility over their work hours. “Nothing in federal or state law precludes allowing employees to choose different or similar blocks of work hours each week,” Reich told The Verge.

Uber and Lyft describe driving as a “side gig” — and for many drivers, it certainly starts that way. It did for Edan Alva, who started driving for Lyft eight years ago to help make ends meet. But after he lost his main job, driving became his primary source of income. And that was when he became aware of the inequities in the system.

“I found myself having a hard time existing in the Bay Area,” Alva told The Verge. “It became an existential struggle to earn enough money to finish the week, finish the month.”

He said without taking costs into account, he earns roughly $15-$20 an hour driving for Lyft, but after paying for gas, insurance, and vehicle maintenance, that fell to as little as $4-an-hour. Alva was one of hundreds of drivers who have traveled to Sacramento in recent months to lobby in favor of AB5. He believes that Uber and Lyft can’t be trusted to do right by drivers, despite their pleas to the contrary.

“If a company cannot sustain profits and pay their labor fairly,” he said, “then this company shouldn’t exist.”

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