At this point, it’s still a game of chicken between the state and the company.
At this point, it’s still a game of chicken between the state and the company.
T he rideshare company Uber is threatening to end its operations in California entirely if the Golden State forces the company to classify all its drivers as employees rather than contractors, a move more likely in the wake of an August 10 court decision.
“If the court doesn’t reconsider, then in California, it’s hard to believe we’ll be able to switch our model to full-time employment quickly,” CEO Dara Khosrowshahi told CNBC on August 12.
It’s not exactly the plot of Ayn Rand’s famous Atlas Shrugged novel, but it’s pretty darn close. A powerful government entity has told a prominent company, “To do business here, you must obey,” and the business is saying, “Okay, then, we’re leaving.”
Possibly. At this point, it’s still a game of chicken between the state and the company. Uber doesn’t want to have to stop doing business in California, and the state doesn’t want to lose a popular rideshare company operating there. So, who calls whose bluff first?
Perhaps both sides digging in and fighting to the end would actually be a good thing. It would reveal who’s actually right on the underlying issue: Is the contractor-based business model used by Uber and Lyft actually essential to their service?
Uber and other ride-sharing companies insist that’s the case. They note that the majority of their drivers drive for them only ten or fewer hours a week. Only about 17 percent are full-time, according to a National Bureau of Economic Research working paper. Most drivers specifically want the flexibility to work when and for as many hours as they want. The companies realize that that is the way they attract the drivers they need. Tellingly, Uber has been working with its main competitor, Lyft, to preserve this business model against California’s challenge.
California legislators say that’s simply a dodge to get around having to pay the full benefits for overtime, health insurance, unemployment, and other legal obligations, since those rules don’t apply to contract work. The state’s lawmakers have attempted to force these companies to provide those benefits by passing the AB5 law, which strictly limits the type and amount of contract work that can be done. The law has proven to be a major headache for freelance workers, limiting the ability of people such as translators, photographers, musicians, and yoga instructors, among others, to earn a living. California has nevertheless stuck to its guns, arguing that the law is important as a way to protect those workers.
Earlier this week Uber endorsed a policy of having state governments require gig-economy companies to create benefit funds for their workers. It hopes that this will address the criticisms that it doesn’t provide adequate benefits and protections for its workers, without throwing out its contractor-based business model.
“Our current system is binary, meaning that each time a company provides additional benefits to independent workers, the less independent they become,” Khosrowshahi wrote in a New York Times op-ed. “It’s time to move beyond this false choice.”
The benefit-fund proposal hasn’t gotten any takers so far and almost certainly won’t in California. This is as much of a political fight as it is an economic one. Lawmakers such as California governor Gavin Newsom are fighting for their allies in organized labor. They can’t simply back down at this point and let Uber and Lyft off the hook without looking like, well, they are backing down. Nor can Uber and Lyft back down and accept drivers as full employees if their claim is that contracting is central to their business model. Certainly, the companies can’t make the change without radically restructuring how they do their business.
Ironically, we already have an existing model for ridesharing favored by California lawmakers: It’s called the “taxicab system.” The principal reason that ridesharing companies such as Uber and Lyft took off in the first place is well known to anyone who has tried to hail a taxi in the rain, in a difficult neighborhood, and with an expectation of respect and cleanliness. Taxis didn’t respond very well to the needs of consumers.