AB5 — A Benefit or A Cost?

On September 18th, 2019, California Governor Gavin Newsom signed into law Assembly Bill 5 (AB5) – “arguably the strongest of its kind in the nation,” according to the LA Times. What exactly is this, you may ask? Well, AB5 is a piece of legislation which, “will help reduce worker misclassification – workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits,” says Newsom. Although this sounds all well and good, “gig economy” companies such as Uber, Lyft, Postmates, and the like – companies that take advantage of app-based technology to allow individuals to work on their own time for extra cash – will likely feel the pain of increased regulation on components of their core business models. Threats may arise for these companies, ultimately putting into question the longevity of their businesses.

Since these companies identify their workers as independent contractors, the new bill’s designation of what an employee is might have adverse effects on gig economy company operating costs. It says, “a worker is an employee if his or her job forms part of a company’s core business, if the bosses direct the way the work is done or if the worker has not established an independent trade or business.” Since Uber would be nothing without their drivers, the drivers’ jobs definitely constitute part of the company’s core business; additionally, Uber determines when/how long drivers can drive, and the drivers have no independent business. After all, without the app-based matchmaking platform Uber has created, riders would likely not feel as comfortable getting into a random person’s car. The issue here is that Uber/Lyft drivers and Postmates couriers are independent contractors – until the description of “employee” was changed… They voluntarily sign up for what is essentially part-time work through the Uber/Lyft/etc. app, understanding that their work is based on consumer demand and nothing else. There is no governing body that pays them for their time; the only way for drivers to make money is if a rider requests a ride and the driver accepts. 

Regardless, companies like these need to find ways to combat the ever changing regulatory landscape in which they operate. An example of this is Uber’s recent announcement of their new project – Uber Money. According to TechCrunch, “Uber Money currently oversees Uber’s credit card, debit card, wallet for drivers, Uber Pay, Uber Cash and other financial products Uber may deploy down the road ... Additionally, Uber will start offering cash back on gas starting at 3% and up to 6% for the highest tier of Uber Pro drivers.” Though this seems like a step in the right direction, cash back on gas is only one of many things Uber can do to appease its complaining drivers. (I would argue that this feature should have been part of Uber’s core business model from its inception.) That said, Uber’s push into the financial services industry also seems promising, as we’ve seen success with other companies doing the same in their search for new revenue streams. Perhaps this strategic move could help offset the increase in operating costs Uber will likely face as a result of AB5, but only time will tell. “With 100 million ‘monthly active platform consumers’ via Uber, Uber Eats and more,” TechCrunch says, “a dedicated path toward new and better financial products may not only lead to happier, more loyal drivers but a company that’s actually, one day, able to post a profit.”