Politicians in California have passed a new bill aimed at making gig economy companies give workers more protections, like a minimum wage. But the real test will be in the courtroom.
On the heels of a driver-led protest outside Uber’s San Francisco headquarters, where drivers showed their support for gig worker protections legislation (via Assembly Bill 5) and demanded a union, Uber is circulating a petition urging people to “protect ridesharing in California.” In the petition, Uber advocates for a policy that would offer drivers a minimum of $21 per hour while on a trip,* paid time off, sick leave and compensation if they are injured while driving, as well as a collective voice and “the ability to influence decisions about their work.”
Uber and Lyft suffered a setback in their months-long fight against rules that could force them to reclassify California drivers as employees.
The ride-hailing companies, along with other businesses that depend on gig-economy work, have been talking with unions about potential deals that could exempt them from state rules making it harder to treat gig workers as independent contractors and avoid additional employment costs.
One of those unions, the International Brotherhood of Teamsters, told California’s governor Thursday it’s against proposals to grant technology platform companies a pass. The move was conveyed in a letter sent by California’s State Building and Construction Trades Council on behalf of a list of affiliates including the Teamsters. It’s a blow to companies’ efforts to avoid making sweeping changes to their businesses.
“Our executive board voted unanimously to oppose any legislative proposal allowing technology platform companies to exploit workers by treating them as independent contractors with substandard protections,” according to the letter, which was sent to the leaders of the state Senate and Assembly as well as to Governor Gavin Newsom. The letter also voices the groups’ “strong opposition” to creating a separate “third category” of worker, apart from employee or independent contractor, as a special exemption for “technology platforms that actively seek to advance a more regressive economy.”
A top California Teamsters leader called out the ride-hailing companies more directly in a Thursday interview. Randy Cammack, president of the Teamsters council covering southern California, said that he is in “full agreement” with the building trades letter and opposes any exemptions for Uber or Lyft from the state’s new standard for who’s an employee. “You give these guys a break, and all these other employers would say, ‘Well, why shouldn’t we be exempt?’” he said. Cammack said his council participated in talks with Uber, but “won’t be attending any more” in the future. “Everything that I’ve heard that they want to do, I’m in total opposition to,” he said. Uber’s growth has already hurt Teamster industries like delivery, said Cammack.
Ride-hailing and food delivery companies are trying to defuse a major threat to their business models: a new standard dictating that workers can’t be considered independent contractors under California wage law unless, among other things, they are doing work that is outside the usual course of a company’s business. The state supreme court established the standard last year, and the senate is now considering a bill, passed by the assembly in May, that would codify it and apply it to a wide swathe of laws.
For a company whose whole business rests on contract workers exempt from employment laws like overtime pay, the new rules threaten huge added costs and liabilities. After last year’s landmark court ruling put gig companies on the defensive, they warned privately that the new employment rules would “decimate businesses” and appealed unsuccessfully to state lawmakers and the then governor, Jerry Brown, to shield them.
Governor Newsom, a Democrat friendly to both labor and the technology industry, has been urging the two to reach a compromise. His chief of staff has held meetings in recent months with union leaders, CEOs and workers on the issue, said people familiar with the matter, who asked not to be identified because they weren’t authorized to speak publicly. If no such deal materializes and the law advances through the state senate, Newsom could be forced to either infuriate business by signing the bill or unions by vetoing it. Newsom’s office didn’t immediately respond to an inquiry Thursday on the letter.
“Lyft is advocating for an approach in line with the interests of our driver community, by modernizing century-old labor laws that make it difficult to provide both flexibility and benefits,” CJ Macklin, a spokesman for Lyft, said Thursday in response to the unions’ letter. Davis White, a spokesman for Uber, said in an emailed statement: “We remain actively committed to discussions with labor organizations and lawmakers to improve the quality and security of independent work.”
Representatives for gig-economy companies, including DoorDash Inc., Instacart Inc., Lyft Inc., Postmates Inc. and Uber Technologies Inc., have met recently with leaders from major unions. The companies have proposed introducing legislation that would extend new perks to their drivers while excluding them from state-mandated protections for employees. In a joint editorial last month from the chiefs of Uber and Lyft, they offered to create a benefits fund for drivers, a pay guarantee for the time spent picking up or dropping off passengers and an association to advocate on their behalf.
A spokeswoman for the Teamsters international union declined to comment on how the building trades letter applies specifically to Uber. Doug Bloch, political director for the Teamsters council covering Northern California, said in an emailed statement that the union is committed to passing the bill pending in the state senate. “We think every worker should have the right to organize and the fundamental labor protections that helped build this country’s middle class,” he wrote.
The Teamsters, a union with 1.4 million members in North America, could play a pivotal role in derailing any efforts to sell a deal to other unions and to the Democrats who control both chambers of the legislature. If the industry can’t win over the Teamsters, firms could still hope to find compromise with other prominent unions that companies have met with, which include the Service Employees International Union and the United Food & Commercial Workers.
One asset for Uber is Laphonza Butler. She was president of one of the SEIU’s largest local unions until last year and is now a partner at SCRB Strategies, a California-based business and political consulting firm. There, Butler has advised and represented Uber in its dealings with organized labor on employment issues and also serves as an adviser to the presidential campaign of Kamala Harris, the Democratic senator from California. An Uber spokesman said Butler brings a valuable perspective to the company’s efforts to improve work for drivers, and a spokesman for Harris declined to comment. Butler and her firm didn’t respond to requests for comment.
In recent months, SEIU leaders have entertained the prospect of a bargain with companies. A late 2018 memo circulated by the SEIU’s California council outlined the possible benefits of legislation like what has since passed the assembly, including strengthened worker protections and, by forcing changes to companies’ business models, a path for “potentially the entire gig sector” to organize. It also laid out a list of drawbacks: many years of anticipated litigation, a “slow and difficult” path to unionization and the possibility that the governor, state referendum process or U.S. Congress subvert their efforts. “Companies will fight this option fiercely and on a united front,” according to a copy of the memo reviewed by Bloomberg.
More recently, SEIU California circulated a summary of potential alternative legislation. The proposal would provide “flexibility to platform companies and platform workers,” according to the memo. It would create systems for collective bargaining, “portable benefits” accounts and minimum pay guarantees but would allow companies that meet certain criteria to seek “flexible alternative standards” in place of those covering other employers in areas such as overtime, breaks and worker’s compensation.
Such an approach alarms some drivers. Cutting a deal that deprives app-based workers of full employee rights “will absolutely damage the future for workers,” said Nicole Moore, a Lyft driver and organizer with the advocacy group Rideshare Drivers United in Los Angeles. She said any kind of special arrangement would reverberate far beyond ride-hailing and food delivery. “Workers can be deployed from apps in any industry,” Moore said.
In public, union leaders have taken a hard line. Mary Kay Henry, international president of the SEIU, said in February that the union intends to “reach an agreement that’s not a concession.” Henry discussed the issue in a recent meeting with Newsom’s chief of staff.
Bob Schoonover, president of the SEIU’s California State Council, said Thursday that the group “has not and would not support any third classification or interpretation of employee classification that would undermine employee status and protections” granted by last year’s court ruling and the proposed law. SEIU intends to help workers “maintain and expand upon” those protections instead, he said in an emailed statement. Schoonover described the memos exploring potential compromises on employment rights as “ideas and concepts” that “should not be construed” as something more significant.
Vikrum Aiyer, vice president of public policy at food-delivery provider Postmates, urged unions not to disengage from discussions. “California and our governor are uniquely poised to confront their first future-of-work test by enacting pro-worker and pro-innovation policies that modernize the safety net,” Aiyer said in an emailed statement, “but only if labor remains at the table.”
Some business leaders are frustrated that Governor Newsom hasn’t done more to protect them, said Michael Lotito, co-chair of the law firm Littler’s Workplace Policy Institute and a member of the U.S. Chamber of Commerce’s labor and employment law litigation committee. California’s policy debate “is the most significant labor and employment issue that we have today in the country,” he said.
Lorena Gonzalez, an assemblywoman who authored the labor bill, said she has no intention of amending it to exclude gig workers. “If people don’t want to pass a bill because it doesn’t take care of multi-billion-dollar corporations, then that’s up to them -- and if the governor doesn’t want to sign one, that’s up to him,” she said. “I have every indication to believe it will in fact pass and that the governor will sign it.”
Last week, the California Senate's Labor, Public Employment and Retirement Committee held a hearing and passed Assembly Bill 5 (AB5), which promises to make it harder for companies to claim workers are independent contractors and increase the operating expenses of Uber, Lyft, and other on-demand companies that already find themselves unable to turn a profit.
Written by Assemblywoman Lorena Gonzelez (D-San Diego), AB5 codifies the California Supreme Court’s unanimous May 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles where an “ABC test” was introduced to determine whether a worker was an employee or an independent contractor. Individuals with sufficient control over how and when they did their work are independent contractors, while workers without much control are employees.
While AB5 easily passed in the Assembly this May, 53-11, it has a long and ugly fight ahead of as it must pass multiple votes in the Senate then be signed into law by Governor Gavin Newsom. Each step of the way is an opportunity for companies like Uber and Lyft to intervene and extract concessions. Newsom has been evasive about whether he’ll side with his long-time political supporters in the Bay Area or his deep bench of union endorsements, which filled his gubernatorial campaign war chest with millions.
Shortly after AB5 passed the Assembly vote, Uber's CEO Dara Khosrowshahi wrote an op-ed in the San Francisco Chronicle with Lyft's co-founders Logan Green and John Zimmer titled, "Uber, Lyft ready to do our part for drivers." In their op-ed, they declare that "our companies are no longer upstarts,” but are now “public companies that tens of millions of people rely on for mobility and for work." In response to the waves of protests, strikes, and regulatory backlash targeting their exploitative business model, the trio argues that the real problem lies with "century-old employment laws."
Over the past few months, Uber and Lyft, along with other companies like DoorDash and Postmates, have tried to negotiate with unions and propose alternatives to AB5. The major alternative proposed is a third category for worker classification. This third category would be a chimera where workers could remain independent contractors but gain some of the benefits and protections expected for employees.
While these companies are united in supporting the third category in the name of a flexible work schedule, workers and unions are not. The California Labor Federation (CFL), a group that represents most of California's unions and over 2.1 million workers, is firmly opposed to anything other than AB5. In New York, attempts by the State Federation of Labor to craft a bill that worked similar to the proposed third category were lambasted by Hector Figueroa, then-president of New York's Service Employees International Union chapter.
Undeterred, Uber and Lyft have managed to patch together a coalition of driver support, thanks in part to a manipulative campaign where they sent out a vague petition using their apps prompting drivers to "fight for driver flexibility and independence." Drivers later revealed they did not know what the petition was for and did not think they were able to opt-out of signing it. The companies sponsored a counter-protest outside the Capitol Building in Sacramento as the hearing went on. Drivers organized by the California Chamber of Commerce and a coalition of groups that worked closely with Uber and Lyft against AB5 not only were helped in putting together a rally on the day before but paid $25 to $100 to attend.
Uber, Lyft, DoorDash, and Postmates derive a huge share of their sales from California: 41 percent of all Postmates' US sales are in California, 27 percent with DoorDash, 24 percent of Lyft's rides, 17 percent of Uber's rides, and 13 percent of UberEats' sales. When Tony West, Uber's general counsel and chief legal officer, was asked whether AB5 was an existential threat to Uber, he literally laughed then listed some (but not all) of Uber’s past scandals like its numerous lawsuits, toxic workplace culture, and massive data breach in 2016, the implication being that the company could survive if it became law.
The real threat is that AB5 could become a model everywhere. Let’s take Uber, for example. Before Uber went public, it filed and released an S-1 form, a document laying out all the information necessary for investors to clearly understand a company’s operations. Uber’s section dedicated to potential risks was particularly interesting. In it, Uber said its business would "be adversely affected if drivers were classified as employees instead of independent contractors" because it "generate[s] a significant percentage" of its gross revenue from five metro areas: Los Angeles, New York City, the San Francisco Bay Area, London, and São Paulo.
Uber has never made a profit and has actually lost over $14 billion in the last four years alone. In the prospectus, Uber insists that these five major metropolitan markets are essential to its path to profitability. In reality, what Uber actually relies on is the $20 billion in funding raised over the past decade and the $8 billion in new investments after going public in May. This investor welfare covers the cost of low prices that render each rideshare trip unprofitable, of driver incentives to combat the high turnover rate of drivers, and of promotions used to drive up demand.
The investors have continued piling that money onto Uber because they believe Khosrowshahi when he talks about becoming the “Amazon of transportation” or the platform on which all transportation happens. In other words, a monopoly. After achieving a monopoly, some commentators warn that Uber will then charge whatever price it wants and use its dominant position to both pay back investors and kill potential competitors. As an added bonus, Uber promises it will turn its labor costs to zero by deploying a fleet to autonomous vehicles (which may prove to be difficult to widely adopt). That is Uber’s path to profitability.
Equity research analysts at Barclays project Uber is on track to lose $3.9 billion in 2019 and if AB5 were passed, it would cost the company upwards of an additional $500 million. A drop in the bucket. But if AB5 were to become law and other states follow California's example and pass similar laws, it could constrict these companies' already narrow paths to profitability. Investors saw no clear path to profitability in Lyft’s S-1. Postmates hopes to use the money generated from going public to expand geographically and achieve profitability. DoorDash says it’s profitable (if you don't include overhead expenses like salaries and rent). If nationally adopted, the investors behind each of these companies could cash out and bankrupt them. AB5 isn’t an existential threat, but it will cause one.