Dara Khosrowashahi and Logan Green may soon have to rethink their business models. California’s Assembly Bill 5 is slated to re-classify “gig economy” workers as employees, potentially affecting the state’s 400,000 “gig economy” workers at companies like Uber, Doordash, and Lyft. California Governor Gavin Newsom is expected to sign this bill, which would take effect on New Year’s Day of 2020.
Notably, the bill states, “A person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation or business.” This section is known as the ABC test.
Predictably, management at Doordash, Uber, and Lyft are pledging $90 million for the purpose of a statewide ballot initiative to exempt their companies from this future law. Yet, this may be to no avail, as the companies would have to demonstrate that the work done by their drivers is not essential to their business model, despite the fact that these companies were basically built on the idea of independent contracting. However, Newsom is willing to compromise with these companies, so as to keep the prices of ride hailing apps down for the general public.
Under this current business model, Uber and other companies do not have to pay their contractors minimum wage or overtime; additionally, there is no requirement to give health care or retirement plans, and payroll taxes do not need to be paid by companies for their contractors. The responsibility for expenses such as the automobile and gas falls on the contractors, cutting costs for these tech companies. This business model can cut operation costs by as much as 20%. This is particularly important for companies like Uber, which has still not become profitable.
Overall, Assembly Bill 5 is sure to create some changes in the economy which could potentially change the future of ride-hailing apps as we know them.
