As Uber Technologies Inc. and Lyft Inc. face a judge’s demand to comply with California law and make their drivers employees instead of contractors, the ride-hailing giants could go down a few potential roads.

The companies could win their appeal or their ballot measure could pass in November, giving drivers some new benefits but creating a different classification for them that falls short of employee status.

Alternatively, the two companies could lose those attempts to maintain their business model largely unchanged and be forced to hire drivers as employees — unless they overhaul their business completely and turn to the taxicab industry’s franchise model.

As ordered by a state appeals court, by Sept. 4 Uber UBER, +3.04% and Lyft LYFT, +3.60% must submit sworn statements from their chief executives that the companies have developed plans to classify their drivers as employees in case they lose their appeal against the California law and their ballot initiative fails.

The companies’ preferred path

Proposition 22, which Uber, Lyft and other gig companies put on California’s November ballot, is the most important variable in the discussion of the future of the gig economy in the state. It would create a new category of employment for gig workers and exempt them from Assembly Bill 5, a California law on worker classification.

Among the measure’s proposals is a health care subsidy based on the number of hours a driver works a week, but drivers would only be able to take advantage of the subsidy if they already are enrolled in a qualifying health plan.

Other benefits included in Prop. 22: guaranteed minimum earnings, some medical and disability coverage for illness and injuries on the job and compensation for expenses — all of which are less than the benefits to which employees are entitled.

Along the same lines, Uber Chief Executive Dara Khosrowshahi in a recent op-ed reiterated a proposal to establish a portable benefits fund, an idea that has also been supported by Lyft’s top executives.

As Khosrowshahi wrote, gig companies would be required to pay into a fund that workers could tap for cash for either health insurance or paid time off. “Had this been the law in all 50 states, Uber would have contributed $655 million to benefits funds last year alone,” he wrote.

That figure highlights the fact that Uber, Lyft, Instacart Inc., DoorDash Inc. and other gig-economy app makers do not currently pay employment taxes for their drivers and couriers, unlike employers that contribute to unemployment insurance funds, medical-leave funds and more. That contrast became clear at the beginning of this pandemic, as drivers filed for unemployment insurance when demand for rides plunged. Critics of the companies pointed out that taxpayers — not Uber and Lyft — paid the bill.

Catherine Fisk, a law professor at UC Berkeley who teaches labor and employment law, has long said the companies should pay into the safety net for workers like other employers.

“There’s no need for gig companies to re-create programs that already exist,” she said. “Uber and Lyft don’t have to create a new benefits plan for unemployment, we have one. Same for workers’ comp — the state of California has one. They don’t have to pay into a new fund for health care, that’s called the ACA (Affordable Care Act). They don’t have to pay new funds to sick leave, the state requires paid leave.”

The worker-classification fight has played out mostly along party lines, with Democrats and unions backing the existing California law on worker classification. However, some Democrats and progressive organizations have voiced support for portable benefits — and they point to examples such as Social Security benefits, health plans for entertainers, workers’ compensation for black-car drivers and more.

Last week, when Uber and Lyft were preparing to shut down ride-hailing in California as they awaited the state appeals court’s ruling, San Jose Mayor Sam Liccardo, a Democrat, released a joint statement with San Diego Mayor Kevin Faulconer, a Republican. They said “California can use this moment to create a national model for enabling gig workers to thrive in the innovation economy.”

In an interview with MarketWatch, Liccardo said, “This fast-changing 21st century economy is demanding that the law look differently at the relationship between worker and company.” He said portable benefits — which are being considered elsewhere, such as in Washington state — seem like a happy medium.

“We have to move beyond the intense divisiveness of a nation in which one side declares victory only after 500,000 Californians lose their income, and the other side ‘wins’ when the same 500,000 are deprived of basic benefits and worker protections,” the mayor said.

The Aspen Institute, a center-to-left-leaning think tank, advocates for portable benefits, which would be attached to individual workers and apply across different work arrangements, with contributions from multiple employers.

Even if Uber and Lyft lose their appeals, their ballot proposition fails, and they are eventually forced to classify their drivers and couriers as employees in California, “tens of millions of people are working in nontraditional arrangements,” said Alastair Fitzpayne, executive director for the Aspen Institute’s future of work initiative.

“The question is still germane: How do you create security for independent contractors?” Fitzpayne said. “We still have an inequitable and outdated system that hasn’t caught up with the complexity of our workplace.”

Going with a retro model

If they lose their appeals and at the ballot, Uber and Lyft have considered switching to a franchise model, the New York Times reported recently.

The franchise model is used by taxi companies and FedEx Corp. FDX, +1.69%, which after paying hundreds of millions of dollars in settlements over misclassification of its drivers as independent contractors has switched many of them to be employees of franchisees instead. Franchisees buy routes from FedEx and are the direct employers of delivery-truck drivers.

“FedEx shifted employer responsibilities to former contractors and succeeded in creating an underclass of employee drivers,” said Beth Ross, a San Francisco-based labor and employment lawyer who was the lead attorney for the plaintiffs in the case in which 12,000 drivers sued FedEx over their classification as contractors several years ago.

Ross added that after FedEx shifted to the franchise model, also known as the independent service provider model, the company did not adjust pay for drivers despite the creation of a new middleman. Some of those drivers — a couple were her clients — then “applied for and received different forms of public benefits,” she said. “They weren’t making enough money to support themselves and their families.”

What California law requires

The other scenario is treating drivers as direct employees, something other ride-hailing companies that provide on-demand rides are doing. Dallas-based startup Alto, which now offers service in Dallas and Fort Worth and is coming next to Houston and Austin, is an example.

Will Coleman, co-founder and CEO of the on-demand, membership-based company, stressed that Alto’s philosophy is the opposite that of Uber and Lyft.

“We are not a technology company, we are a service company,” he said in an interview. “We want to provide the same safe, high-quality experience every time. We can’t do that with independent contractors.”

Next stop for Alto is Los Angeles. The venture capital-backed startup is applying to become a transportation network company in California, which Coleman said is a strategic choice for Alto’s expansion.

“We want how we’re treating drivers to be part of the national conversation,” he said. Of the startup’s almost 200 uniformed drivers, about 60% are full time and receive health benefits, while the rest are part time by choice and receive certain incentives, he said.

*by Levi Sumagaysay via MarketWatch*