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For-Hire Backfire

eye on the news

For-Hire Backfire

California’s new regulation on Uber and Lyft risks harming a huge segment of the economy—and misses a chance to define a new category of worker. September 13, 2019
California

This week, the California legislature passed Assembly Bill 5, which defines so-called gig economy workers as employees instead of independent contractors. Though aimed at transportation-network companies (TNCs) Uber and Lyft, the bill, taking effect in 2020, could have wide-ranging effects on California’s economy—and the nation’s. By forcing new-economy companies to adopt rules developed for twentieth-century employees, California is missing an opportunity to create a new class of worker, a hybrid of independent consultants and traditional employees.

AB5 is intended to ensure that TNC drivers receive minimum-wage and overtime protections and that companies pay workers’ compensation and other payroll taxes. Unlike traditional employers, however, TNCs don’t schedule when or where their drivers work, or for how long. Drivers make the choices on schedules, shift lengths, and locations. Little justification exists for paying a driver more after he has been driving for more than eight hours by choice, especially since Uber can’t charge more—to the customer, the ride is no different than any other ride.

Minimum-wage laws are another awkward fit for TNC drivers. Activists suggest that drivers should be “on-the-clock” whenever they’re logged in to the Uber app to accept rides—but again, drivers have the choice to accept or decline requests, so it’s not clear why a driver sitting in a parking lot but declining rides should be paid the same as a driver actively moving customers. The issue is complicated further because many drivers work for Uber and Lyft simultaneously, logged in to both apps and accepting whichever ride comes in first or looks most promising. Should these drivers get paid twice?

The bill assumes that TNC drivers all work full-time. But this is not always, or even mainly, the case. Uber “black” drivers typically work full-time schedules, but as professional livery drivers with high-end cars, they get paid premium rates, so minimum wage is not an issue. Part-time student drivers are common, as are part-time drivers working a second job. Many drivers don’t work fixed hours, but rather set an earnings target for the day, knocking off when they reach it. One woman I spoke with drives for Uber after she finishes her regular nine-to-five job. She works in San Francisco but lives in the East Bay area; instead of spending 90 minutes each afternoon in traffic, she picks up fares for an hour, then heads home after rush hour.

Strict wage and overtime requirements could force TNCs like Uber and Lyft to put restrictions on their drivers, forcibly logging them out to prevent overtime or cutting ties if they don’t accept a certain number of rides per hour or day. These constraints would harm the economic prospects of students and others earning valuable side income. It could also be a net loss to riders: Uber and Lyft have been a boon to travelers in areas not dense or busy enough to support traditional cab service, but if those areas can’t support enough rides, service may be lost.

AB5 reverses the regulatory principle of being narrowly written but broadly applied. Instead, it is broadly written (defining “employee” with language such as “usual course” or “customarily engaged”) and narrowly applied, with varied exemptions in the bill for, among others, doctors, grant writers, fine artists, and commercial fishermen, with additional exemptions from the Unemployment Insurance Code and Industrial Welfare Commission. Many businesses straddle the line between contractors and employees, just as TNCs do. Uber and Lyft get the headlines, but the same issues apply to food-delivery services such as DoorDash and Postmates. Apps today help you find a handyman (TaskRabbit), hire a mover (Lugg), or sign up a freelancer to do almost anything (Fiverr.) Less visible to consumers, B-to-B companies and websites connect a broad range of independent contractors, such as programmers. Interfering with this economic ecosystem could harm many more workers than TNC drivers are helped. If a prospective programmer in Boise misses his big break with a client in Chicago because of how California interprets another programmer’s relationship with an app in Santa Monica, multiple parties suffer.

AB5 could even disrupt traditional small businesses far removed from the tech economy of Uber and Lyft. Workers in many firms—from prosaic nail salons to high end yoga studios—are often independent contractors, for many of the same reasons as TNC drivers. The work is either secondary to another job or part-time by choice for flexibility with family and school. Wrapping these firms up in a bill aimed at multi-billion-dollar startups could crush a lot of small entrepreneurship in California. AB5 currently exempts manicurists, but only until 2022, and exempting certain other workers includes requirements—such as a barber issuing a Form 1099 to a salon—unlikely to be met by poor and immigrant workers.

For all the problems with AB5, it does identify a significant issue. While TNC drivers are not employees, traditionally defined, Uber and Lyft’s claims that their drivers are independent contractors, traditionally defined, miss the mark, too. The drivers don’t negotiate their rates with customers or the TNC; the app sets the price, and the customer’s credit card gets charged by the company, which then pays the driver. What TNCs and many other technology companies have created is essentially a new class of worker, one for whom certain controls (price and wages) remain with the company, while others (hours, the ability to work for a competitor) are retained by the worker.

California is missing a huge opportunity to define this new class of worker and enact appropriate rules. A good start would be exempting drivers from minimum-wage and overtime requirements—as noted, drivers have control over when and where they work, and even how much they make, by choosing to drive during surge-pricing periods—while requiring TNC companies to pay workers’ compensation and unemployment taxes. The AB5 solution, applying laws drafted a century ago for factory workers, is bound to backfire or create unintended consequences, for workers and for the economy.

Photo by Justin Sullivan/Getty Images

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