Why a California Law Could Impact the Future of the Gig Economy

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Wharton's Matthew Bidwell and Lindsey Cameron and UC-Hastings' Veena Dubal discuss a new California law that could upend the gig economy.

Business executives and policymakers across the country are closely watching California, which has long taken the lead in establishing regulations that affect the technology, energy, automotive and housing sectors. The state with the largest economy is about to set the pace again with legislation that could reclassify hundreds of thousands of gig economy workers as employees.

Assembly Bill 5, or AB5, passed the state House and Senate earlier this month and is now on the desk of Gov. Gavin Newsom, who has indicated he will sign it. Under the law, which takes effect January 1, a number of firms – including rideshare, trucking, publishing and cleaning companies — would be required to recognize independent contractors as employees who are entitled to minimum wage and benefits such as sick time and health insurance. The measure is widely known as “the Uber law,” referring to the popular ridesharing platform that has made headlines for its refusal to consider drivers as employees. But Uber, which has maintained that it is exempt from the regulation, isn’t the only business that could be forced to change under AB5. An army of 1.5 million freelance workers in the state could also be converted to employees by the new law.

The Knowledge@Wharton radio show on SiriusXM invited three professors to discuss the law’s passage and what it means beyond the borders of California. Wharton management professors Matthew Bidwell and Lindsey Cameron joined Veena Dubal, law professor at the University of California at Hastings, to offer insight into what could be a bumpy road ahead for companies like Uber and Lyft, whose business models rely heavily on contract labor. (Listen to the podcast at the top of this page.)

Following are key points from the conversation.

The Law Provides Clarity

The difficulty in defining a contract worker has existed for as long as those workers have been around. In the 1980s, the Internal Revenue Service developed a 20 factor test to help classify the relationship. That test was used against Microsoft in the early 1990s when the agency determined that a large portion of the company’s workforce was classified as freelance for tax purposes when they were, in fact, employees. They worked on site, were supervised by company managers, used company equipment and supplies, and worked the same hours as regular employees.

Despite the IRS test, the relationship has remained a “gray area,” Bidwell said. The new law will help clear up the ambiguity over who is a contractor and who isn’t, he said. It’s also sure to provoke a backlash.

“There are a lot of organizations that are using people as contractors who will find that, under this law, those people need to be classified as employees. It’s going to be a big change. Where you sit on whether that change is positive or negative probably depends on your perspective,” he said. “From my point of view, we have employment laws for a purpose. We have a sense that there’s an imbalance of power by and large between employers and employees, and we want to have protection for employees.”

“If your entire business model relies on paying people below statutory minimums, is that really a business model we want to be supporting?”–Matthew Bidwell

But Cameron thinks more confusion is possible because of the expanding role that algorithms have in the administration of labor. They can be used to slice work down to the smallest tasks.

“I think why Uber and Lyft are really interested in this is about algorithms,” she said. “One of the definitions of trying to figure out whether somebody is a contractor or not is how much their work activities are coordinated by their hiring organization. There has been a lot of conversation of whether or not the algorithms that run these platforms are acting as sort of a pseudo-manager.”

Dubal believes the issue is fundamentally about control. She referenced the Borello Test, which has been used for decades in California to determine contractors vs. employees. A vast majority of companies flouted the test because there was no real enforcement, and workers had no recourse except to sue.

The new law requires an ABC test: Workers are employees if (A) they perform tasks under a company’s control, (B) their work is integral to the business and (C) they do not have independent enterprises in that trade.

“This is really about power, and it captures power dynamics and power relations, whether or not they are algorithmically enabled, in a much more clear way.”–Veena Dubal

“What the ABC test says is that this is actually about power, which is why and how we have the panoply of laws that were put in place during The New Deal in the 1930s, in the throes of the Great Depression,” Dubal said. “People who didn’t have power in relationship to their company needed certain protections and certain rights, so the ABC test brings it back to that legislative intent. This is really about power, and it captures power dynamics and power relations, whether or not they are algorithmically enabled, in a much more clear way.”

She doesn’t buy the “public relations push” from companies that the new law creates more ambiguity. In fact, she said, it’s quite the opposite.

“It is the most clear test we have on the books. If you do the same thing as your company, then you are their [employee],” Dubal said. “Although Uber continues to contest that their drivers do the same thing as them, I think the legal analysis around this is actually quite clear.”

The Weary Gig Worker

The professors agree that the gig economy is, by any other name, the same as it has been since the dawn of employment. Whether it’s a trucker who gets paid only for the hours behind the wheel, the freelance writer who has no health insurance benefits or the contracted software engineer who logs as many hours as a full-time employee, the hustle is the same.

What is different, they said, is that more and more companies are leaning toward the freelance model as a way to cut costs. In addition to no benefits, they don’t have to pay unemployment insurance or payroll taxes for contractors. A 2016 study by UCLA found that companies can reduce expenses by up to 20% by relying on contractors.

Still, Bidwell pointed out, contractors make up only 10% of the total labor market, and that figure has been stable for 20 years.

“There are all sorts of interesting opportunities for people to structure their lives and their work in ways that are different from regular employees, but it’s not the huge segment of the labor market that people would like it to be,” he said.

“There will be a disproportionate, almost inverse impact on these types of companies that rely solely on contract workers.”–Lindsey Cameron

Cameron has a different perspective because she’s driven for both Uber and Lyft. She has followed a group of 100 drivers for the past three years and said that all but one of them depend on the rideshare work for all of their earnings. The flexibility of freelance is a myth when drivers are spending 14 hours a day in their cars just to pay the bills, she said.

“Even though I agree with Matthew that, on a national level, the number of contingent workers maybe hasn’t grown that much, I think from the business end of it, you’ve got businesses like Uber and Lyft [and others] that rely all on contract workers to get their work done,” she said. “There will be a disproportionate, almost inverse impact on these types of companies that rely solely on contract workers.”

Taking the long view, Dubal said companies have been “thriving off the ambiguity” since the early 20th century. Yet the relationship between employer and worker has remained the same since then — it is still about subordination.

“If we eventually do have a growth of contract work, it’s not because fundamentally the work has changed,” she said. “It’s because of how companies are trying to evade laws so that they don’t have to pay the extra 25% to 30% that employment actually costs.”

What’s the End Game?

One of the more interesting legal aspects of AB5 is a last-minute amendment that gives city attorneys the power to file injunctions against companies that are not in compliance. It’s an enforcement mechanism that should put firms like Uber on notice. The company has maintained that the law doesn’t apply to rideshare operations and said previous rulings have found that drivers’ work is outside the core of Uber’s business as a technology platform.

“If a company like Uber says, ‘No, no, we’re still going to play the game the way that we’ve been playing the game,’ a judge could do something like institute a civil contempt. And civil contempt gives judges wide leeway in creating punishments for these companies,” Dubal said. “So, you could have something like an executive in a holding cell. Or you could have a wide range of tactics that the state could use to create a situation in which the companies have to follow the law.”

Bidwell has no doubt that the regulation will force a change in the business model for many companies, including ridesharing platforms. Scheduling, pricing, the number of drivers — all those will have to be adjusted. Costs will go up.

“There is certainly a big part of me that thinks if your entire business model relies on paying people below statutory minimums, is that really a business model we want to be supporting?” he said.

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