On Tuesday, California Attorney General Xavier Bacerra filed a lawsuit against ride-sharing companies Uber and Lyft for classifying their drivers as contractors rather than employees as supposedly required by the state’s controversial new law, AB-5. Signed last year, AB-5 restricts the ability of companies to hire contractors except in limited circumstances, thereby entitling more workers access to an hourly wage, health insurance, and other benefits.
While this sounds like a worthy ideal, the Golden State is making a big mistake pursuing this lawsuit. Classifying ride-sharing drivers as employees will likely lower the income of good drivers while leading to more expensive rides for customers. Especially in the middle of a pandemic, California should be making it easier for entrepreneurs to do work instead of hassling them.
First, it’s important to note that AB-5 has sweeping effects in numerous industries beyond ride-sharing. Most freelancers who collect miscellaneous income from companies in the most populated state (such as writers, musicians, translators, photographers, and so on) are affected by this law. However, Uber and Lyft are the law’s primary target because of their great success in the gig economy.
While California’s employee classification requirement undoubtedly works to the benefit of mediocre drivers, it will punish the most exceptional and productive. Ryan Radia of the Competitive Enterprise Institute breaks it down:
In contrast, if our driver were an employee, Uber would have to pay the employee at least the California minimum wage of $13 per hour. Assuming our driver is paid minimum wage and works the same number of hours as an employee — while taking the full 64 hours of paid sick leave for which the driver is eligible — Uber would pay our driver $25,792 in one year (1,920 hours worked plus 64 hours of paid leave at $13.00 per hour).
Considering the new costs of onboarding a driver (including health insurance, sick leave, worker’s compensation, and unemployment insurance), Uber and Lyft will have a huge incentive to be more controlling of drivers’ schedules and locations served. In the past, ride-sharing drivers enjoyed the freedom to start whenever they liked, drive for however long they like (within reason), and service whatever areas they so choose.
However, with the new costs in place, companies will doubtlessly scrutinize employee productivity and profitability more closely. In that case, the companies may also be less keen to share windfall earnings during surge pricing, since it would be an expectation, not an option, to service rush hours and locations.
Moreover, all of the increased costs will ultimately be passed along to consumers in the form of higher fare prices and possibly longer wait times if there are fewer ride-sharing drivers on the road as a result of the new regulations. The aforementioned CEI study estimates that Uber’s driver expense per mile in California will rise from $1.38 to $2.30 per mile — a 67% cost increase that could easily be borne by the rider.
The bad timing of California’s challenge should especially be underscored. With the COVID-19 pandemic ravaging the economy, Uber and Lyft rides declined 83% in April. Now is the worst possible time to burden companies that provide for hundreds of thousands of drivers with more hurdles to jump through.
California may be able to sneak away with a win while its residents’ attention is diverted during a crisis, but it could be in for a rude awakening. Public opposition to AB-5 is growing, with a petition to repeal the law gathering signatures to become a ballot initiative. For the sake of hardworking drivers’ bottom lines and customers’ wallets, let’s hope that this awful law soon becomes a relic of the past.
Casey Given (@CaseyJGiven) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is the executive director of Young Voices.
Correction: This piece previously misspelled the last name of Competitive Enterprise Institute fellow Ryan Radia.
