California and the Death of the Gig Economy

A lot of people I know drive for Uber or Lyft (or sometimes both). They use it as a side hustle, a supplementary source of income. They like it because they choose when to work and for how long; it doesn’t interfere with their work or life schedule. A former coworker of mine has used Uber to pay down debt, driving forty or more hours a week on top of his full time retail job. I also know another coworker who quit his retail job to drive for Uber and Lyft full time. It didn’t last very long until he gave up.

I always chat with Uber drivers when I use the service as it’s always interesting to see how people are using the driving app to conform it to their lives. Sometimes the drivers are retirees. Some are in school. Occasionally there will be the full-time driver who drives daily all day. They all like the flexibility of making their own schedule, they can take breaks whenever they want, they earn as much as they want, and they collect their fares every week. (Under Uber’s new Uber Instant Pay program, some areas can even withdraw instantly when a threshold is met.) These ridesharing businesses are the quintessential ‘gig economy’ jobs — you perform a service (gig) for a company as a contractor and you’re paid for your service. No strings attached, everything’s temporary and it’s essentially on the contractor’s terms: when you want, as much as you want, and you accept what the company is offering for compensation. This is the new normal.

So is it any wonder labor activists are against it? This past week a bill was passed in California’s senate to “end rampant misclassification” of workers as independent contractors according to The Sacramento Bee in an article entitled “California sees to make Uber, Lyft drivers employees with passage of new California labor rules.” From the same article:

“It makes sure that the one million independent contractors in California get the wages and benefits they deserve,” said Assemblywoman Lorena Gonzalez, the San Diego Democrat who authored the bill.
But the loudest voices raising concerns about the bill have been gig economy companies. Ride-share companies Uber and Lyft and delivery service DoorDash have pledged to spend a combined $90 million to take the issue to voters in 2020 if they don’t secure some relief from the new employee classification test.

If you’re unfamiliar with it, a contractor is not the same as an employee. A contractor is someone a company pays for a service, who is not employed by the company, and is paid 100% of their compensation — the employer does not do any withholding and it is up to the contractor to claim his compensation on his own taxes (You may have heard of the 1099 form that companies send to their contractors at the end of the year totaling everything they were paid that year for services). An employee is someone who is contractually bound to work for the company, and is bound to various state and federal labor laws. A contractor receives no benefits, insurance, pension, etc from the company because the don’t actually work for them.

In the first five years of my company, I relied solely on contractors to grow my business. Why? Because my company had very few contracts with clients. We were hired on a per-need basis, not on an extended contract. This meant there was no guarantee of work and we could only sub-contract help when it was needed. Employees would have been a huge drain — we would have had to make payroll (including payroll taxes, benefits, etc) twice a month even if no jobs or new clients were coming in; we’d be out of business in months. Contracting allowed us to hire when we needed to and not be beholden to paying someone when there wasn’t work.

So back to this California bill to give “one million independent contractors the wages and benefits they deserve.” The problem is in the fact they’re independent contractors to begin with; they agreed to Uber (and Lyft) terms of service when they started driving for them. Like my former coworker who quit to drive Uber full time, these contractors are attempting to make a career in ridesharing. It’s not designed to be such. It is, after all, a ‘gig economy.’ It’s a chance to make money on the side, on the schedule you set, and in turn you’re helping Uber and all the people who need a quick ride somewhere. By making these independent contractors employees, California is going to upend this free market system.

Let’s think it through, shall we? California forces Uber and Lyft drivers (as well as various others such as port drivers, musicians, translators and even freelance journalists) to be classified as employees. The drivers sign contracts with these companies and are now entitled to health benefits, unemployment insurance, workers compensation, etc. Big win for Ms. Gonzalez and the labor activists. Drivers will now get more than they bargained for, and so will riders.

Right off the bat costs go up because employees are expensive. In addition to the compensation (which shifts from a per ride basis to an hourly wage, given labor laws and must be $12 an hour per current California law, and even higher in other California towns), employers must pay towards medical benefits, unemployment insurance and employer payroll taxes, workers compensation, and the HR expansion to meet the new 1 million employees added to the company. That’s a lot to ask from a company that just posted a $5.2 BILLION loss in one quarter this past April. The company suffered billions in losses for the years 2017 and 2018 as well. So who pays for these employee benefits?

You, the rider, do of course. Uber and Lyft fares in California will have to increase to compensate for the increase cost of the driver — remember, the driver was only making money per ride, now they must be paid for every hour on the clock. At some point it might be just cheaper to have your own car if you Uber regularly.

The other thing that will immediately change for the drivers is schedule. As employees, they become beholden to when Uber or Lyft schedules them to work. No longer can an Uber or Lyft driver pick up a fare on the way to somewhere the driver is already headed. You can’t drive for an hour and then take the rest of the day off. Or take a whole week off and come back and start picking up fares again. You’re an employee now, and the company will tell you when you need to be driving and for how long.

Drivers would also no longer be able to reject a fare, take breaks whenever they wanted, and would be forced to drive during slow times when there may be no fares at all. This last one is essentially waste — an employee is driving a car, using gas, with no fares because it’s slow time. It costs the driver and the company.

As an independent contractor, federal law allows you to write off expenses related to your work. Uber and Lyft drivers write off their gas, mileage, car repairs and maintenance. These expenses can be deducted from federal taxes. You lose these deductions when you’re an employee. Uber and Lyft can technically offer to reimburse you for them, but they’re not required to do so. You definitely cannot claim mileage and gas as an employee on your federal taxes. (I know this because I once tried to argue claiming miles and gas for having to drive to work with my tax accountant, who laughed at me.)

A lot of drivers will also use both Uber and Lyft apps to maximize fares. Since drivers are paid only when they take fares, using both apps ensures minimum downtime and the maximum amount of fares. If you’re employed by Lyft, you can’t use the Uber app while you’re on the clock. This means lost fares and also means less of a supply of drivers for people who need to get somewhere. An employee of Lyft driving around will drive right past an Uber rider looking for a ride.

There is also the issue of automation. Uber (along with other companies) has been spending heavily in research of self-driving cars and automated driving. Right here in Pittsburgh, Uber has their ATG (Advanced Technologies Group) developing self-driving car systems. If Uber was forced to take on the additional costs of labor under California law, the first thing they’ll want to do with automation is relieve those costs. Guess which state Uber will start piloting their fleet of automated vehicles when they become road-approved. If McDonald’s can do it with kiosks, Uber will do it with self-driving cars.

Given the shift drivers will undergo, I have to wonder if people will just quit driving for Uber and Lyft after becoming employees. On the flip side, both companies could also lay off drivers to save costs. Those that drove on the side in their off hours would likely have to quit driving for Uber or Lyft or risk it impacting their other employment. My coworker who drove in the free time of his retail job would have to choose one or the other since Uber would be providing a set schedule. Regardless of his choice, his income drops because he loses a source of revenue.

From the first glance here it appears Assembly Bill 5 could have disastrous effects on personal income in the state of California. People working as contractors on their terms will be forced to conform as am employee or lose out on their former gig. Jobs could be lost to automation. Some companies may up and move, taking their jobs with them or choose to cut back because they can’t afford to take on these contractors as employees. So why would California’s legislative body and Governor Gavin Newsom pass AB 5?

Very much like the Fight for 15 movement, it gives the perception of looking out for the ‘little guy.’ As Newsom himself said, AB 5 “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.” But there’s another big shift not being mentioned here — payroll taxes.

As an independent contractor, any compensation does not have taxes withheld. If a company hires you for $100/hr and you work 5 hours, you receive $500 from the company and are responsible for filing your own taxes. After making $600, the company is legally required to send you a IRS 1099 form, showing how much you made. Under AB 5, this goes away. You’re now an employee, and beholden to tax withholding. Your taxes are taken out of your paycheck immediately…including California state tax and all applicable local and federal taxes.

As the Tax Policy Center puts it:

But California’s new law goes well beyond mere tax reporting rules. It reclassifies these workers as employees, with all of the tax and labor law effects that implies. Massachusetts already has adopted similar rules for defining employment, and New York’s Labor Department has said that Uber drivers are employees who are eligible for unemployment insurance benefits. Now that California has jumped in, don’t be surprised if other states move aggressively to turn on-demand workers into employees—both to protect worker rights and collect some additional revenue.

And without being able to write-off your expenses, you — now as an employee and not a contractor — will pay more overall in taxes. It also prevents creative accounting practices, deductions, underreporting, or any other method that could potentially be shortchanging the state of California on tax revenue. As an employee, they’re just taken out of your paycheck.

Regardless of what actually happens, this California senate bill will certainly change the nature of the gig economy.