Tensions are surging as Uber and Lyft scramble to cut a deal to escape California’s crackdown on the gig economy.

Both ride-hailing companies are in talks with labor unions to create a loophole to block their drivers from getting employee rights granted by California’s Supreme Court, according to the New York Times — angering drivers and pitting labor unions against each other.

Last year, the court ruled that workers in the gig economy should get many of the same protections that all employees get, like a minimum wage and overtime pay. Last month, the State Assembly passed a bill to guarantee those rights and expand them. AB 5 would make it harder for companies to label workers as independent contractors instead of employees, a common practice that has allowed businesses to skirt state and federal labor laws.

However, Uber and Lyft really, really don’t want to pay the added cost of hiring drivers as employees instead of independent contractors. Both firms reportedly have been meeting with the Service Employees International Union (SEIU) to support an amendment to exempt them from complying with the bill, which is headed to the California Senate for a vote at the end of the summer. In exchange, Uber and Lyft executives said they would give drivers some benefits and would pay a union to advocate for drivers.

News of the backroom deal has further incensed ride-hail drivers in Los Angeles who helped organize a strike in May for higher pay and union rights.

The news has also triggered a rift among labor groups in the state, the Times reports. Many union officials who support the bill say drivers don’t need to compromise because the courts already ruled in favor of gig workers. Labor leaders at SEIU disputed reports of a backroom deal, telling the Times that the union supports AB 5 and full employee status for drivers.

Each twist and turn in the feud over AB 5 is being watched closely. The bill is one of the biggest challenges yet to the ride-hailing companies’ business models and would rewrite the rules of the entire gig economy. Hundreds of thousands of independent contractors in California, ranging from Uber and Amazon drivers to manicurists and exotic dancers, would likely become employees under the bill.

That small status change is huge. These workers would suddenly get labor protections and benefits that all employees get, such as unemployment insurance, health care subsidies, paid parental leave, overtime pay, workers’ compensation, and a guaranteed $12 minimum hourly wage. It also means companies are fuming about the added cost — Uber and Lyft especially.

Uber and Lyft recruit drivers to push back against California bill
While Uber and Lyft have been quietly lobbying behind the scenes for an exemption to AB 5 for the past few months, including enlisting drivers to help, they’ve also been begging in public for a compromise.

Uber and Lyft want to keep treating drivers as contractors, and in exchange, they promise to set a minimum pay rate for drivers while they’re picking up and dropping off passengers, to create a company-backed fund for benefits like paid time off, and to establish an association for drivers to advocate for further improvements.

In a San Francisco Chronicle op-ed published last month, Uber CEO Dara Khosrowshahi and Lyft co-founders Logan Green and John Zimmer argued against the bill, suggesting that drivers would no longer have the flexibility to make their own schedules if they became employees.

“It’s also no secret that a change to the employment classification of ride-share drivers would pose a risk to our businesses. But it’s equally true that the status quo can and should be improved,” they wrote.

The op-ed has angered drivers and labor advocates. So has another Uber strategy: using the apps to get drivers to oppose the bill. “Tell lawmakers to protect driver flexibility,” read the message that Uber began sending to drivers in mid-June, without mentioning the bill or how it might change their employment status.

And now that labor unions are making deals without their input, drivers who have been organizing in recent months are even more furious.

It’s impossible to know exactly how many drivers support AB 5, but at least 385,000 Uber drivers in California and Massachusetts sued the company, claiming they are employees, not contractors (those two class-action cases were settled in March).

The battle between drivers and ride-hailing executives shows no signs of cooling off, and so much is at stake. The outcome has the potential to reshape, or disrupt, an exploitative business model championed by Silicon Valley and exported to the world.

California’s AB 5 bill, explained

The California bill, known as AB 5, expands a groundbreaking California Supreme Court decision last year known as Dynamex. The ruling and the bill instruct businesses to use the so-called “ABC test” to figure out whether a worker is an employee. To hire an independent contractor, businesses must prove that the worker a) is free from the company’s control, b) is doing work that isn’t central to the company’s business, and c) has an independent business in that industry. If they don’t meet all three of those conditions, then they have to be classified as employees.

That is a much clearer — and stricter — standard of proof than the vague guidelines under federal law. And it’s one of the biggest challenges yet to the profit model of Uber, Instacart, Postmates, and other tech companies that rely on a small army of independent contractors. Uber likely would have to reclassify tens of thousands of drivers in California as employees, something Uber drivers have been fighting for in court, unsuccessfully, for years.

“Big businesses shouldn’t be able to pass their costs onto taxpayers while depriving workers of the labor law protections they are rightfully entitled to,” San Diego Assembly member Lorena Gonzalez tweeted after members voted overwhelmingly in favor of the bill she helped write.

California businesses have been panicking over the possibility of the bill passing. The state’s Chamber of Commerce and dozens of industry groups have been lobbying for exemptions, and a long list of professions was excluded from the bill: doctors, dentists, lawyers, architects, insurance agents, accountants, engineers, financial advisers, real estate agents, and hairstylists who rent booths at salons.

Industry groups argue that these professionals are true independent contractors, with their own businesses and power to negotiate work contracts. Lawmakers agreed. After all, the purpose of the bill is to shrink income inequality by helping workers that employers are most likely to exploit. Uber drivers are the loudest in that group.

Ride-hailing apps have done everything to keep drivers as contractors
When Uber drivers went on strike across the world in May, much of their frustration had to do with their lack of power as independent contractors.

Uber’s profit model, like that of other companies in the gig economy, depends on all the money saved from skirting US labor laws.

By classifying drivers as independent contractors instead of employees, Uber doesn’t need to pay certain taxes, benefits, overtime, or minimum wages to tens of thousands of drivers. As self-employed contractors, drivers don’t have a legal right to form labor unions or negotiate contracts.

Uber drivers have spent more than six years fighting the company in court, saying they’ve been intentionally misclassified. They argue that drivers should be considered employees because the company has so much control over their workday, including strict rules on their vehicle conditions, what rides they can take, and which routes to use.

Uber has fought back, maintaining that drivers are not employees because they set their own schedules and provide their own cars.

So far, the issue has not been resolved, at least not at the national level.

In March, Uber settled the main court case with 13,600 Uber drivers, agreeing to pay them $20 million, but without changing their status as independent contractors. The other 350,000 drivers who were part of the initial class action lawsuit had signed mandatory arbitration agreements, so a federal judge is requiring them to pursue their cases in a private forum, where they are less likely to win their case.

It would be hard for Uber to pass the ABC test if the California bill becomes law; driving people around in cars is a central part of the company’s business. Any challenge to the drivers’ status as contractors threatens Uber’s bottom line, which is another reason the bill is so significant.

Uber has been upfront with investors about the risk of a labor revolt. In a recent Securities and Exchange Commission filing, Uber acknowledged that giving drivers the same legal rights as employees would “fundamentally change” the company’s financial model:

If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees … we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes, and penalties.

So it’s unsurprising that Uber is not happy about a law that would force the company to hire drivers as employees.

As employees, gig workers would have a safety net for the first time ever. The changes from the bill would also benefit the state of California, which estimates that it loses $7 billion in tax revenue each year from companies that misclassify employees.

A court ruling changed everything

A 10-year-old lawsuit in California paved the way for AB 5. In April 2018, the California Supreme Court ruled in favor of workers in the case Dynamex Operations West v. Superior Court.

Drivers for the delivery service Dynamex Operations West first brought their case for employment status more than a decade ago. They argued that they were required to wear the company’s uniform and display its logo, while providing their own vehicles and shouldering all the costs associated with the deliveries, and thus should be classified as employees, not independent contractors. (Amazon drivers recently sued the company for similar reasons.)

In May 2018, the state’s highest court agreed with Dynamex drivers. The ruling essentially created the ABC test as precedent, but it only relates to workers seeking minimum wages and overtime pay. The case didn’t address workers’ compensation benefits. It didn’t clarify which workers are entitled to rest and meal breaks, or who has a right to paid parental leave and other guaranteed benefits.

Many states use some version of the ABC test, but usually just to determine whether someone is entitled to unemployment benefits. Only New Jersey, Vermont, and Massachusetts use the standard to enforce all state labor laws.

Under federal law, there is no clear standard. The federal courts and the US Department of Labor decide who has been misclassified by weighing multiple factors, including how much control the company has over the worker and how central their work is to the company’s operations.

If passed, California’s AB 5 bill would reflect a major turning point in the post-recession economic expansion. California has the largest state economy in the country and is home to the Silicon Valley tech industry — which means its lawmakers have outsize influence in national politics. The bill could lead other states to take similar action.

“Here we are in a great economy and yet most working people have no money saved,” Caitlin Vega, legislative director for the California Labor Federation, told me at the time. “[Companies] are doing this because they can; they’ve gotten away with it.”

Democrats have a veto-proof supermajority in California’s Senate and Assembly, so there’s a good chance AB 5 will become law, making it harder for those companies to get away with misclassifying their workforce. The question now is whether lawmakers will let Uber and Lyft skip the test altogether.

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