California lawmakers approved a heavily debated bill that could reclassify some on-demand contractors as employees. The law will take effect in January but the companies that will be impacted the most—Uber, Lyft, DoorDash, and Instacart—say they’ll continue to fight it.
The California State Senate approved Assembly Bill 5, with a vote of 29-11, late Tuesday. On Wednesday, the state assembly also signed off on it, leaving the final approval to Governor Gavin Newsom, who has already expressed support for the bill.
At stake: Companies may have to reclassify some of the hundreds of thousands of on-demand workers from self-employed contractors to employees with benefits. The change could include Uber Eats and DoorDash food delivery people to Lyft drivers as well as Instacart personal shoppers. The companies would have to provide often-pricey health benefits and pay a portion of taxes for each employee. This comes at a time when Uber and Lyft, both of which went public earlier this year, are struggling to cut massive losses and prove they have a path to profitability.
Uber has already had two layoffs of more than 800 employees this year and the departure of two C-level executives. Meanwhile, Lyft has also been shedding some of its key leaders, like COO Jon McNeill who exited after a year and a half on the job.
“It’s a clear financial negative,” Dan Ives, analyst at Wedbush Securities, said in a note on Wednesday. “We expect Uber, Lyft, and other gig economy companies will reduce hiring and reduce flexibility of its workforce in California.”
While Uber, Lyft, DoorDash, and Instacart were disappointed in the outcome of the vote, they say their fight is not over.
“Today, our state’s political leadership missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits,” Lyft spokesman Adrian Durbin said in a released statement. “We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need.”
Lyft and Uber already ponied up $60 million—a number expected to increase in the coming days—for a campaign that would push the issue to California voters. The goal is to pass an alternate resolution that would give on-demand workers guaranteed minimums, the ability to organize unions, and benefits but still allow them the flexibility of working when and where they want, according to the companies. DoorDash separately said it was investing $30 million in the cause, and Instacart said it would continue to work with lawmakers and voters for a “better solution.”
Meanwhile, Uber went a step further to suggest that even if its alternative option, which the company already uses for European drivers, is not adopted, the new law doesn’t necessarily change anything.
Tony West, Uber’s chief legal officer, on Wednesday said AB 5 only raises the bar for companies in specific industries, including tech, to classify workers as independent contractors. It does not automatically reclassify drivers, for example, as employees.
“Because we continue to believe drivers are properly classified as independent… drivers will not be automatically reclassified as employees, even after January of next year,” West said.
West added that drivers work outside the company’s “usual course of business,” which the company characterizes as a technology platform serving various digital marketplaces. Uber has won that case in multiple courtrooms in the past few years.
“It is not drivers who serviced Uber, but Uber who serviced drivers,” reads a 2017 arbitration agreement between Uber and Uber driver Adonnis Biafore. “The drivers, therefore, are not its employees, but its customers.”
But the state has the ability to challenge that classification under the law. And if other states pass a similar law—New York is also considering a version of AB 5—Uber and others could face numerous litigation challenges in the near future.
West said Uber is “no stranger to legal battles,” given that it has operated in a heavily regulated environment for years.
“There could be an impact if we fail the test,” he said about the classification, declining to say exactly how big the impact would be. “At the end of the day a third party or arbitrator will make that decision.”
If companies fail to prove that their on-demand workers should remain contractors, they would likely have to switch to assigning shifts to their employees.
Lyft already sent a warning signal out to its drivers on Wednesday via email.
“As a result of AB 5, you may soon be required to drive specific shifts, stick to specific areas, and drive for only a single platform (such as Lyft, Uber, DoorDash, or others),” the email read. The company also requested that drivers rally for the alternative it’s supporting.
Ives of Wedbush said when all is said and done, the result will likely be a compromise between state lawmakers and the companies.
“We fully expect gig economy companies to continue to push back and find a middle ground,” he said, “but it’s unclear if and how much they will start paying in the interim period.
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