Written by Tess Britton
Back in September of 2019, the State of California successfully passed the AB5 bill compelling all companies that hire independent contract workers to reclassify this workforce as employees. This bill, informally known as the “gig worker bill”, made headlines due to the drastic effects this legislation would have on app-based transportation and food delivery companies such as Uber, Lyft and Doordash. In retaliation Uber, Lyft and Doordash poured roughly $200 million into the ballot initiative to exempt these companies from the bill (LA Times). By doing so, it is up to the citizens of California to decide on the outcome of this proposition.
It is important to understand why California passed this bill in the first place. Before 2020, independent contract workers were not classified as employees and therefore did not have the rights to employee benefits such as minimum wage, paid time off, sick leave, etc. Contract workers are defined as workers who work for a fee in exchange for a service. These benefits of being considered an employee come with heavy costs for employers. Due to high costs, these employers are incentivized to hire contract workers rather than full time or part time employees.
California decided to do something about this issue. Believing that they were doing the best for their citizens, California lawmakers passed the AB5 bill in September of 2019 to go into effect January 1st, 2020. For many independent contract workers, the opportunity to have a more stable income was much cause for celebration.
However, these benefits come with many drawbacks for both employers and employees that rely on the gig economy.
The AB5 bill being passed meant that labor costs for Uber, Lyft and Doordash would skyrocket. According to a study conducted by UCLA, “companies can reduce expenses by up to 20% by relying on contractors” (UPenn). When rideshare companies and food delivery companies can no longer cut these costs, they rely on incurring costs to the customer in order to cover these new labor expenses (Forbes).
In turn, these higher priced services drive down the demand for the product due to the increase in price for the consumer.
To explain this further, the effects of this bill can be demonstrated in a simple economic model demonstrating the effect of a price increase on demand.
It is evident from this figure how an increase in price causes the quantity demanded to fall. Simple economics shows why Uber, Lyft and Doordash would oppose this bill along with their contract workers.
When we incorporate the supply into this decrease in demand, we get an economic supply and demand model that looks like this:
The shaded triangle represents the amount of excess supply that will occur when this increase in price happens. As a result, there will be more Uber, Lyft and Doordash drivers than the market will demand as well as some worker’s wages being decreased to minimum wage. In simple terms, unemployment will occur.
The Harvard Business review further describes this dilemma for ride share companies and how this policy will in turn affect their customers. The article explains that the rideshare industry “is a very competitive industry, mainly due to the fact that drivers have the ability to “multi-home,” i.e., drive for two or more platforms, as many do.” However, if Lyft and Uber drivers are classified as employees, then each platform will be able to legally restrict its drivers from driving for a competing platform” (HBR).
Gig economy means that a worker isn’t bound to a particular company; therefore allowing workers to take on many jobs at once, something that would not be possible if they were considered to be employees. This, as a result, further cuts many workers out of the market that they so desperately need to be a part of to make an income.
Besides not being able to work for multiple companies, considering gig workers as employees limits their ability to participate in the market in other ways as well. For many gig economy workers, these jobs complement their main jobs. As a full employee, these hard working citizens would not be allowed to work multiple jobs that they may need in order to sustain a living.
Karin Klein, a contract writer, describes in her Op-Ed why some drivers are better off being considered independent contract workers for these rideshare companies. She states, “those who prefer to work as contractors include parents who want to stay home with their young children and disabled workers who need to work from home or at times when they feel well enough. Others simply like to set their own hours and working conditions, decide when they will take vacation, deduct their business expenses and simply be their own bosses” (SacBee).
While some may argue that these employee benefits offered by the AB5 bill are essential to full time workers who rely on the gig economy for their income, it is evident that in the long run, many former workers will be cut out of this market all together.
Adrian Durbin, a Lyft Spokesman describes this bill as “our state’s political leadership missed an opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earning standard and benefits” (NYT 09/2019).
This is where Proposition 22 comes in, exempting app-based transportation and delivery services from the AB5 bill. The two-hundred-million-dollar campaign that was initiated by Uber proved successful given the outcome of the vote as demonstrated by the table below.
Mark DiCamillo, a pollster for UC Berkeley’s Institute of Governmental studies, commented for the LA times about why this vote passed. He describes how for workers, “a yes vote would maintain workers’ current status as independent contractors, while providing a few extra benefits such as a healthcare subsidy and minimum wage, depending on hours driven. A no vote would alter drivers’ employment status, which companies said would force them to restructure their businesses” (LA Times). Given these ideas, it is clear why voters would choose to support this proposition in order to ensure that rideshare workers ultimately are the beneficiaries of the results.
While this issue remains controversial, it is evident that the economic implications of the AB5 bill proved to be more harmful than helpful to both the employers and employees. While some independent contractors may benefit from this bill, it was important to Uber, Lyft and Doordash that their workers remain able to choose their own schedule and rely on a flexible job. Proposition 22 – passed by the vote of California citizens – made it so these app-based companies could continue with their practice per usual.
Appendix
2020 California General Election Results. Election Results. Retrieved November 18, 2020, from https://electionresults.sos.ca.gov/returns/ballot-measures
Hussain, S., Bhuiyan, J., & Menezes, R. (2020, November 13). How Uber and Lyft persuaded California to vote their way. Los Angeles Times.
Bergman, A. (2020, January 10). How California Assembly Bill 5 Affects the Gig Economy. Forbes.
Conger, K. (2020, November 4). Uber and Lyft Drivers in California Will Remain Contractors. New York Times.
Filabi, A. (2020, October 23). How California’s Prop 22 on gig employment could impact financial services. Reuters.
Hagiu, A., & Wright, J. (2019, September 27). What California’s New Gig Work Gets Wrong About Gig Work. Harvard Business Review. H056HU-PDF-ENG
Rosenberg, E. (2020, January 14). Can California rein in tech’s gig platforms? A primer on the bold state law that will try. Washington Post.
Scheiber, N., & Conger, K. (2020, November 11). Fight Over Gig Workers Persists Despite Win for Uber and Lyft. New York Times.
Why a California Law Could Impact the Future of the Gig Economy [Audio podcast transcript]. (2019, September 20). In Knowledge @ Warton. Knowledge @ Warton. https://knowledge.wharton.upenn.edu/ article/california-bill-5-gig-economy/