Uber and Lyft almost shut down their services due to California’s anti-freelancer law

I have written before, that in California,

When AB5 — bill that extends employee status to gig workers — was made into law people celebrated. But after the law went into effect on January 1st, 2020, it ended up hurting the 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.

Yet despite all the apparent negative effects the law has had on workers, California is moving ahead with enforcing the law, forcing Uber and Lyft to almost shut down their services.

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 issued a temporary restraining order suspending the enforcement of AB5. And the two companies will continue to operate in the state in the meantime.

When it comes to the numbers,

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

But Uber and Lyft are not the only ones that will be affected. Even the workers who drive for these companies will be affected once they are classified as employees instead of independent contractors.

Certainly, drivers will receive benefits to which they weren’t entitled before. But they will also incur some costs that may very well surpass the monetary value of the benefits they get.

As one article explains,

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.

The law is anti-business and anti-work

There are only a few possibilities that will come from classifying drivers as workers.

For one, some drivers will likely go out of jobs if Lyft and Uber decide to cut their workforce to deal with increased costs. These companies might also raise costs on consumers to make up for these increased labor costs. Worse yet, Uber and Lyft may just shut down their services altogether, hurting everyone involved.

Contrary to what the proponents of this law expect, it’s highly unlikely that it will benefit workers.

There are so many reasons that people work as independent contractors. Most of them like the flexibility that comes with independent contracting. That is a benefit they will lose if they have to be classified as contractors. But even those who would like to work as employees and receive benefits may see their pay reduced due to taxes and other costs.