When it comes to policies that promote economic growth, politicians in California aren’t always particularly astute, a lamentable fact that was almost underscored this week. That’s because the state is threatening the viability in California of two of its biggest success stories, rideshare companies Uber and Lyft. The two businesses are embroiled in a judicial struggle to maintain their business model in California, and the ongoing dispute almost resulted in the firms shutting down operations in the state. An order by a California appeals court spared the millions of people in California, both drivers and customers, who use their services from that fate—at least for now.
The situation is a direct result of the misguided—to be polite—decisions of certain public officials who seem to know little about running a business. As this blog has reported in the past, the California legislature in 2019 passed a law known as AB 5, which deliberately redefined the standard for determining whether an individual may be classified as an independent contractor rather than employee.
That legislation codified an equally misguided decision by the California Supreme Court known as Dynamex in which that court first modified what is known as the “ABC” test for evaluating an employment relationship. Under part “B” of a typical ABC test, a business can usually satisfy that element if the work being performed is done outside of all physical locations of the business in question, such as in one’s own vehicle. In contrast, California’s peculiar version of the ABC test is intended to make it harder to classify someone as an independent contractor by removing that qualification and saying services provided by an independent contractor must be “outside the usual course of business” of the hiring entity.
After AB 5 took effect in January, it did not take long for politicians of a certain stripe to assail Uber and Lyft, arguing the companies were misclassifying drivers who use those platforms to find customers. A lawsuit soon followed. On August 10, San Francisco-based Judge Ethan P. Schulman ruled against the rideshare companies, but he stayed his ruling for ten days to allow time for an appeals court to intervene if it so chose, which thankfully it did. In the meantime, the companies’ CEOs will have to certify to the appeals court that in the event their appeal fails to overturn Judge Schulman’s ruling, they can comply with AB 5 within 30 days. However, the appeals court also noted that a pending ballot initiative may exempt gig companies from AB-5, which if it passes would make the litigation moot.
The prospect of companies like Uber and Lyft suspending—or ultimately ending—their operations in California would seem to belie the Golden State’s reputation as a haven for innovative technology companies. That possibility—made real by the state’s lawsuit—seemed to hit home, as San Diego’s Republican mayor and San Jose’s Democrat mayor issued a statement asking the appellate court to stay the lower court ruling. Apparently, they comprehend that it might not be good to “shut down an industry that’s vital to the income and livelihood of millions.”
Unfortunately, there is more at play in the effort against gig-economy companies. Behind much of it is organized labor, which has sought any way possible to reverse its six-plus decade membership decline. Since independent contractors cannot unionize, successfully reclassifying drivers for rideshare companies as employees could open the door for organizing efforts to that end. The politicians whom unions lavish with support got the message.
Of course, such a reclassification would have other consequences that those same politicians blithely dismiss. The negative impact of AB 5 has been well-established, as individuals in numerous industries looking for flexibility in their work—or any work during a pandemic for that matter—face the loss of their very livelihoods. For their part, consumers who have grown used to the convenience of ridesharing, delivery, and other innovative services made possible by the technological savvy of the people who founded Lyft and Uber and other app-based companies could suddenly be forced to use less attractive options, assuming such options are available.
The advocates of AB 5 are directly responsible for the debacle that law has created, and they are the ones who must correct their error before it’s too late. This is all the more important because Democrats in Congress borrowed AB 5’s language as part of a bill called the Protecting the Right to Organize (PRO) Act, which passed the House earlier this year and has even garnered the support of Democratic nominee Joe Biden. It’s time to nip the policy failure of AB 5 in the bud before the damage goes nationwide.