Ride-Sharing Apps Were a Success, Then Came the Regulations
There is a threat that may kill the entire ridesharing industry as we know it today. Those who rely on Uber as a means of transportation to school, work, or friends, and more importantly, as a source of income may become stranded if left without alternatives. Chances are, you encountered the antidote on your TV, social media feed, or crammed mailboxes. Uber and Lyft pleaded with millions of California voters in the most aggressive political spending spree and subsequent media blitz of all-time to eliminate the most significant challenge that the two companies have ever faced in their decade long history. So, why are there so many ads about Uber drivers everywhere? And more importantly, why is this proposition even put in front of voters?
Critics of Uber and Lyft argue that app-based rideshare and delivery companies are engaging in a deceptive business practice, commonly known as regulatory arbitration, using legal loopholes to benefit themselves by classifying independent contractors instead of employees. Independent contractors do not receive the same protections, benefits, or compensation as employees, such as medical leave, injury, and disability payments. In many cases, they are even paid less than minimum wage. The trucking and taxi industry was the first to adopt this employment model in the late 70s. It fostered flexibility of schedule, while providing additional tax incentives to workers.
In 2019, California Governor Gavin Newsom signed a state assembly bill, known as AB5, which currently provides the framework for classifying whether an individual is considered a contract-worker or an employee. In order to be considered an Independent Contractor, an individual must meet three factors, which are adopted from a 2018 CA Supreme Court ruling. First, one must perform work that is outside of the “essence or the core” of a business. This provision is the central point of contention argued by litigators in the case of the gig economy. Secondly, individuals must routinely work from a separate business entity or within an independent trade, for example, plumbers work independently with clients. Finally, employee conduct (contrary to work completion) cannot be evaluated by the hiring entity.
In May 2020, Xavier Becerra, the California Attorney General, filed a lawsuit that accused Uber and Lyft of defying AB5. On August 6th, Judge Ethan Schulman, of the San Francisco Superior Court, issued a preliminary injunction giving the companies ten days to cover employment expenses, such as payroll taxes and unemployment benefits, if they intended to continue operating within the state of California. In response, Uber and Lyft threatened to cease all operations within California, its largest market, by the end of the week, leaving their users and drivers stranded. Four days later, they were granted a stay of injunction for their case to be heard by an appeals court. On October 13th, Uber and Lyft faced off before a state appeals court against Matthew Goldberg, the Deputy City Attorney of San Francisco, who defended the state against claims that the original injunction would not prevent drivers from suffering irreparable harm by introducing sworn statements of ride-sharing drivers who were unable to feed their families.
This is by no means a local issue. Currently, Massachusetts is trailblazing the path to regulate the gig economy for neighboring states such as New Jersey and New York to follow. In July 2020, Massachusetts filed a lawsuit against Uber and Lyft after the companies failed to abide by state legislation that resembles AB5. In November 2019, New Jersey introduced similar legislation targeting worker misclassification. In New York, Governor Cuomo outlined regulatory arbitration within the gig-economy as a pervasive issue in his 2020 State of the Union address. “A driver is not an independent contractor simply because she drives her own car on the job,” said Andrew Cuomo, who has yet to take action on the matter.
So, what does the future hold for the ridesharing industry? The answer depends heavily on a statewide proposition hitting the ballots in November. As of late September, Uber and Lyft alone spent $98 million to back Proposition 22, which would define ride-sharing drivers as independent contractors and override the regulatory application of AB5 only for the app-based companies. The antidote for Uber and Lyft problems lies right in the hands of voters.
If defeated, it is likely that Uber and Lyft will keep good on their promise to pull out of California, as they have previously in Austin, Texas. In 2016, Uber and Lyft ceased operations in the tech-capital of Texas, in protest of a municipal mandate which ordered ride-sharing firms to fingerprint all of their drivers as part of a background check. It is notable that the companies returned to operations in Austin only after the requirement was lifted by the state legislature a year later. Although, unlike Texas, California is routinely at the forefront of regulatory action, whether it be anything from internet privacy to environmental protection.
If ridesharing companies decide not to adapt, and California legislators don’t back down, then the industry may adopt a model similar to Alto, a Houston-based transportation company, which prides itself as “not [being] a technology company... [but] a service company.” Unlike its mainstream competitors, alternative transportation companies directly hire their own employees and even provide them with vehicles. It should be stressed that paying for employee benefits while maintaining an entire fleet comes with significantly higher costs, which are always passed down to the consumer. Using sample routes in Houston, Alto is on average 338% more expensive than the cost of what Uber and Lyft for the same route.
Uber and Lyft are taking jabs from all sides, but Proposition 22 moves their problems out of court and into the hands of voters. Riders, legislators, and drivers across the country are watching every move, for California has ventured where no other state has—and as seen in the past—neither side will go down without a fight.
