What Uber And Lyft’s Court Loss Means For The Gig Economy’s Future

A California judge this week ordered Uber and Lyft to stop classifying their workers as independent contractors and start classifying them as employees, an order the two firms have 10 days to comply with barring further legal action. Both firms have already requested stays while they file appeals, but the ruling could have big potential consequences for the gig economy.

The decision came out of a lawsuit filed by California Attorney General Xavier Becerra and the city attorneys of Los Angeles, San Francisco and San Diego. They accused the two ridesharing companies of violating California’s controversial law called Assembly Bill 5, or “AB 5” for short.

AB 5 is a recently passed California state law that essentially requires most gig economy companies in the Golden State to classify their workers as employees and not contractors. Employees generally work set schedules and receive benefits like sick time and health insurance, but independent contractors don’t.

The question of how gig workers are classified has been the subject of heated debate for some time. Gig economy companies argue that their workers don’t want to be employees and have flocked to the gig life largely because they like the flexibility.

“In public surveys over the last decade, the vast majority of drivers have said they don’t want to be employees because of how much they value flexibility. This is because they understand the trade-offs between traditional employment and app work,” Uber CEO Dara Khosrowshahi wrote this week in a New York Times opinion piece.

“Unlike traditional jobs, drivers have total freedom to choose when and how they drive, so they can fit their work around their life, not the other way around,” Khosrowshahi wrote. “Anyone who’s been fired after having to miss a shift, or who’s been forced to choose between school and work, will tell you that this type of freedom has real value and simply does not exist with most traditional jobs.”

Some gig drivers loudly agree with that. For instance, rideshare driver Jim Pyatt told a local Fox affiliate that he loves what he does — including the flexibility. He doesn’t see AB 5 or the new court ruling as a cause for celebration, but as a threat to his livelihood.

“I can go drive whenever I want wherever I want to meet my schedule [and] make sure my parents are taken care of,” Pyatt said. “That’s why I love doing this — it gives me that ability, and they want to take it away.”

In fact, when PYMNTS surveyed gig workers, we found the majority reported they weren’t actually looking for benefit in connection to those gigs. For instance, more than half reported they had access to health insurance via spouses, other jobs or the U.S. Affordable Care Act (Obamacare) and weren’t seeking it from gig work as a primary need. By contrast, gig workers we talked to consistently rated flexibility as paramount.

But the flexibility argument isn’t convincing people across the board. California Attorney General Becerra told CNBC on Tuesday (Aug. 11) that the dichotomy between flexibility and employment benefits is a false choice.

“What worker doesn’t want to have access to paid sick leave?” Becerra told CNBC. “What worker doesn’t want to have unemployment insurance at a time of COVID-19 crisis? What worker doesn’t want to know that they’ll get paid for overtime if they work 60 hours in a week or 12 hours in a day?”

That’s a sentiment echoed by ridesharing driver Jeff Perry, who told a local Fox affiliate that flexibility wasn’t quite the benefit it’s billed as when stacked up against all that drivers lose as independent contractors.

“Employee status seems like the best route,” Perry said. “If I’m not even making half of minimum wage, effectively, after my expenses, then that’s not a viable option for me.”

What happens now?

As noted above, Uber and Lyft have both said they’ll appeal the ruling. Both firms have been hit hard by COVID-19 and have seen their ridership numbers plummet as a result. For instance, Uber recently reported that its ridesharing revenue fell 75 percent in the company’s latest quarter, and that it now makes more money with its food delivery business Uber Eats than it does providing rides. The company added that even with Uber Eats, overall revenue is down 30 percent year on year.

And both Uber and Lyft had difficulty reaching and maintaining profitability even before COVID-19 and have argued that a forced conversion of their labor force from independent contractors to employees would result in driver layoffs and massive contractions in the firms’ services.

“Uber would only have full-time jobs for a small fraction of our current drivers and only be able to operate in many fewer cities than today,” Khosrowshahi wrote in his Times op-ed. “Rides would be more expensive, which would significantly reduce the number of rides people could take and, in turn, the number of drivers needed to provide those trips. Uber would not be as widely available.”

Given how dependent many consumers and workers have found themselves on the gig economy in recent months, it seems like a less than ideal time for that sector to contract. Yes, people might not be hailing rides as often, but they’re having groceries, prepared foods, meal kits and more delivered in record numbers.

A sharp contraction in the gig economy could add more headwinds to a U.S. consumer economy that’s already struggling to get back on its feet. And a lot of furloughed or laid-off service workers who’ve turned to gig companies to keep the bills paid face losing any easily accessed form of employment.

Whether gig workers will inevitably move down the path toward classification as employees or not seems uncertain at best. Besides the court fight, AB 5 faces a November statewide ballot initiative that would specifically exempt ridesharing drivers from the law — an initiative both Uber and Lyft are backing.

Khosrowshahi has also conceded that providing additional benefits and protections for gig workers is important, but that reclassifying gig workers as employees is the wrong way to do it. He’s calling for a “third way” compromise of keeping employees as independent contractors, but gig companies paying into a fund for worker benefits.

The bottom line — it seems some kind of compromise is necessary. Gig work has become an ingrained part of the economy, perhaps more in the past six months than ever before — and reshaped the world of work around it. The genie isn’t going back in the bottle, so perhaps the laws should be rewritten to reflect a world with the genie in it.