California’s State Assembly has just passed a bill aimed at forcing Uber, Lyft and other so-called gig-economy companies to treat their workers as employees rather than as independent contractors. Uber, for example, has long argued that its drivers are not actually employers, labeling them “driver-partners,” but the California legislature did not buy that argument.
The new law stipulates that companies can only contract out tasks that are “outside the usual course” of the company’s business, and that contractors must be “free from the control and direction” of the company.
Any workers who are not contractors must receive benefits, like health insurance and paid time off.
Some expect the new law to lay waste to the gig-economy business model.
California is a huge, important market — some estimate that the change could cost Uber as much as US$500 million a year. Moreover, there is the chance that other states would follow California’s lead.
Uber immediately denied that the ruling applied to it, saying that drivers were not part of its usual business, but the argument seems unlikely to hold up in court.
Howevever, the truth is that gig-economy business models were not looking very healthy anyway.
Although it is not unusual for a company to record losses before going public, Uber and Lyft’s losses are unusually large:
Uber continues to be a cash-burning machine. Partly because of costs associated with going public in May, Uber had a net loss of US$5.2 billion in the second quarter — more than 10 times the highest estimates for what the new California law could cost it.
However, even in a normal quarter, the company’s losses are on the order of more than a half-billion dollars, and it has never made an operating profit.
These huge losses could be justified if the company were expanding rapidly, but although it continues to book more rides, its revenue is barely rising.
Lyft is also losing money.
Fundamentally, if these companies cannot grow their way out of losses, their business model is doomed, whether their drivers are treated as employees or not.
In its initial public offering prospectus, Uber warned that it might never achieve profitability.
New laws like California’s might allow gig-company founders a face-saving way to claim that it was regulation that killed them, not the bleak unit economics of the basic business model.
However, the truth is that any business that could only stay afloat by giving its workers fewer benefits than Walmart or McDonald’s probably was not long for this world in any case.
The importance of California’s new law could go far beyond the gig economy. It could represent the first real attempt to address the rise of contracting and outsourcing in general — what some call the fragmented workplace.
The gig economy is a tiny portion of the US labor market, and the number of independent contractors has actually shrunk a bit in recent years. However, together with so-called diversified workers, who have a variety of income sources, these contingent workers number in the tens of millions:
California’s new law could therefore open the door to a more comprehensive attack on inequality and wage stagnation.
Forcing companies to do more for contractors could be one part of a strategy to redistribute corporate income toward workers.