Long Story Short: The AB5 Bill and Reclassification of Employees Will Impact the Gig Economy.
How Will the Authorization of AB5 Impact Gig Economies?
On Wednesday, September 11th, the California state senate authorized legislation to reclassify certain groups of contractual gig economy workers as conventional company employees. The AB5 bill, which will be signed by Governor Gavin Newsom, will enact into law these changes limiting future gig economy potential. The gig economy provides freelancers and contract-based workers with an alternative to the traditional 9 to 5 job and supplemental income through app-based platforms. The AB5 bill targets many gig economy businesses and may affect ride-sharing companies such as Uber and Lyft, which have not been granted exemptions. Tony West, Uber Technologies lawyer stated, “Contrary to some of the rhetoric we’ve heard, AB5 does not automatically reclassify any ride-share drivers from independent contractors to employees. AB5 does not provide drivers with benefits. AB5 does not give drivers the right to organize. In fact, the bill currently says nothing about ride-share drivers.” Uber and Lyft help to supplement the gig economy with their worker base made of many independent contractors who do not receive company benefits.
Opportunities. The gig economy allows freelancers to turn their labor potential and provided services into a traded commodity through app-based and online platforms. Through services such as Uber and Lyft, freelancers have flexibility than they would with the traditional 9 to 5 job. Matthew Bidwell, an economist at the University of Pennsylvania’s Wharton School, stated “I think the platform economy is a really vibrant niche, and it really has changed certain occupations, with taxi and limousine drivers the poster child.” Surveys conducted by Intuit presented data that 57% of the 15,836 respondents chose gig economy work as a way to earn more income. A report on around 20 million gig economy workers by McKinsey showed that these workers chose contractual positions since they were not able to find stable job opportunities or salaries at other companies. Lawrence Katz, Harvard labor market scholar who published research on the growth of gig economy through 2017, stated, “what we found was a transitional path out of unemployment were people did a lot more independent contracting gig work until they got a more permanent job.” People may choose to turn to gig economy work due to unemployment or other financial difficulties.
Supplemental Income. The rapid rise of the gig economy through digital app-based platforms allows contractual workers to earn more income by providing services to need-based consumers. New California state legislation will impact the gig economy with contract-based workers shifting to use these platforms as a way to supplement additional household earnings. A survey conducted by the Federal Reserve in 2018 reported that only around 3% of adults provided ride-sharing services through tech startups such as Uber or Lyft. Brett Collins of the IRS reported a 1% increase on Form 1099, from 2007 to 2016, in the share of workforce earnings income. Collins stated in his report that gig economy growth had been “driven by individuals whose primary annual income derives from traditional jobs and who supplement that income with platform-mediated work.” Gig workers can make supplemental income while pursuing other career options. Katharine Abraham, a former commissioner of the Bureau of Labor Statistics, agrees: “What’s happening is you’re seeing more people using some of these new ways of getting work to supplement their current jobs.”
Lacking Profitability. Large tech gig economy startups such as Lyft lack profitability and have underperformed in the market, currently trading lower than offering price. Unlike companies like Microsoft, which were highly profitable while worker classification was being modified, newer gig economy startups are not. On March 28 th, the ride-hailing company, Lyft, debuted on the market at $72 a share, valuing the gig economy tech startup at nearly $24 billion, even though it had previously shown losses. At the end of the first day of trading on the Nasdaq, Lyft shares closed at $78, being oversubscribed by almost 20 times. In 2018, Lyft had a $911 million loss, which was up 32% from 2017. Lyft shares were trading around $60 in April as optimism declined due to a lack of future profitability. Uber’s SEC IPO filing showed a gross booking of $50 billion with a reported net loss of $1.8 billion in April 2018. Uber’s continuously slowing growth and loses in profitability have led to greater pessimism by investors. The difficulties Lyft and Uber have had during initial public offerings and profitability loses negatively impacted the gig economy market.
Previous Rulings. Previously large tech companies have contended with the federal government over the classification of workers. In Vizcaino v. Microsoft, the appeals court ruled with the temporary contractual workers over proper compensation and benefits. Donna Vizcaino worked for Microsoft as a permatemp employee producing software user manuals. Since Vizcaino was classified as a temporary contractual worker, she received no employee benefits such as paid vacation leave or healthcare benefits. Microsoft relied on these contractual workers, which increases profit margins and helped supplement the growing workforce, much like how Uber and Lyft do today. The case ruling sided with the contractual workers in December of 2000, with the temporary workers receiving around $100 million in financial compensation.
The gig economy provides workers with nontraditional job opportunities and the ability to earn supplemental income through app-based and online platforms. Gig economy workers sacrifice conventional employee benefits and income stability for a greater sense of freedom. Big tech startups such as Uber and Lyft offer platforms for gig workers to provide services for need based consumers. The authorization of the new California AB5 bill will change the current gig economy climate and may limit its future growth potential.
https://fortune.com/2019/09/12/uber-california-gig-economy-law/, Aaron Pressman, September 12, 2019
https://www.nytimes.com/2019/09/15/upshot/gig-economy-limits-labor-market-uber-california.html, Neil Irwin, Sept. 15, 2019
https://money.cnn.com/2017/05/24/news/economy/gig-economy-intuit/index.html, Patrick Gillespie, May 24, 2017