Uber and Lyft almost shut down their services due to California’s anti-freelancer law
I have written before, that in Californa,
When the AB5, a bill that extends employee status to gig workers, was made into law people celebrated. The law was going to rotect gig workers as well as underpaid or mistreated independent contractors. But after the law went into effect on January 1st, 2020, it ended up bruising people it was meant to protect. Independent contractors saw a decline in their business as well as revenue, with some companies having to drop some of their contracting staff. The law further imposed on the flexibility as well as the livelihood of some independent owner-operators like truck drivers.
Workers deemed the law unfair
Jeremiah LaBrash, a freelance cartoonist, who works as a tech programmer by day has found potential projects drying up after clients discovered he lives in California. LaBrash has seen a 40% decline in his freelance income since the law passed in September.
Another worker, Mr. Nguyen, a Vietnamese refugee, who has been an independent owner-operator for more than 15 years deems the law unfair.
Now they’re telling me, ‘You have to go drive for somebody,’ so what am I going to do with my truck? It’s kind of unfair to me.
California is moving ahead requiring Uber and Lyft to classify drivers as workers
Despite all the effects that the law has had on workers, California is moving ahead with enforcing the law. Up until yesterday, Uber and Lyft had planned to shut down services in the state of California. This is because moving forward with reclassifying drivers would be costly for the two companies. However, the California appeals court issues a temporary restraining order suspending the enforcement of AB5. And the two companies will continue to operate in the state in the meantime.
One study by Barclays estimates that for a typical part-time driver working 20 hours per week and earning $15,600 per year in fares, Lyft or Uber would have to incur $3,625 in additional costs per driver if they become an employee.
Drives will also face additional costs once they are classified as employees
Generally, the focus on discussion has been on these companies and not how workers stand to be affected by being classified as employees. This is also something that needs to be looked at. While drivers will for sure receive benefits once considered employees, this title will also come at a cost to them that may very well surpass the monetary value of the benefits they get.
But the cost to Lyft and Uber is only half the issue. The other half is that the drivers, if they become employees, must also pay their share for some of these benefits. This includes their half of the misnamed Social Security “contribution.” (It is not a contribution since it is mandatory.) Currently, the rate is 6.2% of income paid by the employer and 6.2% paid by the employee, for a total outlay of 12.4%. Medicare works the same way. Employer and employee each pay 1.45%, for a total of 2.9%.
That adds up to another $1,193 that the newly-declared employee must pay out of his earnings. The total hit to employer and employee alike is $4,818. That is nearly 31% in additional costs that must be jointly paid by employer and employee for benefits that they may not want, given the cost.
So, instead of Uber and Lyft facilitating the payment of $15,600 in fares to a typical part-time driver, it will now cost Uber and Lyft $19,225 ($15,600 + $3,625) to deliver take-home pay to the driver of only $14,407 (before income taxes). This is a costly pay “wedge” and a huge financial hit to be paid by both the companies and their drivers. Depending on whose perspective, Uber and Lyft are facing a huge new tax on the money they pay their drivers and the drivers are simultaneously facing a huge reduction in their take-home pay.
This is essentially a law against doing business
Economically, speaking there are a few possibilities that will come out of classifying drivers as workers. Either a lot of drivers will go out of job if Lyft and Uber decides to cut their workforce. To prevent cutting off jobs Uber and Lyft may raise prices for consumers. Or worse yet Uber and Lyft may decide to shut down their services altogether, massively increasing deadweight loss. And if employment and prices are to stay the same, drivers will have to make less money and so will Uber and Lyft. Essentially, in the long run, in one way or another, this will be a gigantic loss for the economy.
There is no scenario whereby forcing companies to classify independent employees as workers benefit everyone. There are so many reasons that people work as independent contractors. Most of them like the fact that the structure of the gig economy gives them flexibility. They will lose if they are to be classified as employees. But even those who would like to work as employees and receive benefits may end up seeing their pay reduced due to taxes and other costs.