The battle for the future of the gig economy is on.
In 2019, California adopted a law intended to force gig-economy companies to treat their drivers as employees, rather than contractors. That law, known as Assembly Bill 5, goes into effect Wednesday. It is already under attack by those it would regulate.
AB5 codifies into law and extends a 2018 California Supreme Court decision that laid out rules for classifying workers as contractors. The toughest bit: It requires that contract work be “outside the usual course of the hiring entity’s business.” The law primarily hits contract workers like drivers and delivery folks, but it also applies to other contract workers like long-haul truckers and freelance journalists. Both groups have challenged the law as unfair.
But the real target of AB5 are drivers for companies like
(LYFT), Postmates, DoorDash and Instacart. Under AB5, those people will be fully protected by U.S. labor laws. Employers will have to pay Social Security and payroll taxes, unemployment insurance, and state employment taxes, while providing workers’ compensation insurance and complying with minimum-wage laws.
Uber has said it doesn’t run a transportation business, but rather a tech business, and thus isn’t covered by AB5.
Uber, Postmates, and one driver for each service jointly filed a lawsuit in federal court in Los Angeles on Monday against the state of California and state Attorney General Xavier Beccera, asserting that AB5 is unconstitutional. The gig companies are challenging the law on other fronts as well, lobbying California’s state house for changes, and collecting signatures for a November 2020 ballot proposition that would effectively allow gig economy companies to route around AB5.
While the lawsuit attacks AB5 on constitutional grounds, the core argument against the law is that it deprives drivers of the flexibility involved in gig work. “If AB 5 were enforced against [Uber and Postmates] in a manner consistent with the sponsors’ stated intent to require reclassification of workers in the on-demand economy, it would harm many independent service providers who prefer to provide services on their own schedules via the app-based platforms that network companies operate,” the plaintiffs say in the complaint. “Inevitably, forced reclassification would eliminate the flexibility and entrepreneurship that is the foundation of platform-based work.”
The lawsuit alleges that AB5 violates the equal protection and due process clauses of the Constitution. “AB 5 is an irrational and unconstitutional statute designed to target and stifle workers and companies in the on-demand economy,” the complaint says.
The plaintiffs also repeat Uber’s previous view that the law doesn’t actually apply to companies like Uber on the theory that transportation isn’t Uber’s primary business. Neither Uber nor Postmates “hires drivers or delivery persons. They are technology companies that create and operate apps, which facilitate the connection of consumers and independent service providers, so that consumers can hire an independent service provider to perform particular services,” the complaint says.
The suit also attacks the legislators who voted for AB5. “[T]heir goal is to deprive workers of the flexibility and freedom of their current independent status, and instead place them under the authority, control, and direction of an employer,” it says.
In a statement, Postmates said that the lawsuit is “an effort to preserve on-demand work opportunities while urging lawmakers, organized labor, and Governor [Gavin] Newsom to return to the table. We need to pursue every possible avenue to make progress, and our comprehensive approach to realizing a modern, gig safety net demands being working partners, not sparring partners, with organized labor; continuing to engage the Legislature; talking to voters about a new safety net for on-demand workers; and heeding the Governor’s call to find a better way.”
Uber said it had nothing to add to the complaint, and instead pointed to a Facebook post from Uber driver Lydia Olson and a Medium post from Postmates driver Miguel Perez. Both are plaintiffs in the lawsuit, along with the two companies.
The fate of AB5 and other attempts to regulate gig employment looms as a huge factor in the future for Uber, Lyft, and other companies in the sector. Among other complications, both DoorDash and Postmates are widely expected to attempt to go public in 2020.
“[D]river classification will continue to be a lingering risk to the entire ride-sharing industry going forward with the possibility of this being adopted at the state level across the U.S.,” Wedbush analyst Dan Ives wrote in a research note after the lawsuit was filed. “[W]e don’t see the legal headwind dissipating in the near term…this lawsuit is a microcosm of fighting possibly the largest risk in the ride-sharing industry and a situation we will be closely watching over the coming months as it plays out in the courts.”
Uber shares were up fractionally Tuesday at $29.82; the stock has declined by 33% since its initial public offering at $45 in May. Lyft shares were a bit lower at $43.43, off 40% since the company’s March IPO at $72 a share.
Write to Eric J. Savitz at email@example.com