California's Mugging of Uber and Lyft Is Anti-Innovation

Last year, California passed the disastrous Assembly Bill 5 (A.B. 5), which sought to force gig economy workers into antiquated full-time employment regulations. The bill has led to an outcry among independent contractors and sharing economy workers, who have seen part-time employment opportunities dry up. Compounding its mistake, California is now suing ridesharing services Uber and Lyft to try to get them to conform to its outdated vision of work.

Any time a business hires a worker, it must assign them one of two classifications. An employee operates under the “traditional” model of work, where the worker has their workflow and hours dictated by a manager, and receives benefits and stricter labor law protections.

Independent contractors, on the other hand, enter into a “contract” with the business, but have almost total flexibility in how they fulfill that contract. Independent contractors set their own hours and workflow and receive no direct management beyond what is expected of them from their contract, but are not entitled to the same benefits and labor law protections.

Uber and Lyft classify their drivers as independent contractors for obvious reasons — for most drivers, driving for Uber and/or Lyft is a side gig to make extra money when they have a few spare hours. Lyft reports that 91 percent of its drivers drive less than 20 hours per week, and 96 percent say that the flexibility ridesharing offers is a crucial part of the appeal of the gig.

If state law forces Uber and Lyft to classify drivers as employees, those workers may initially have access to benefits such as overtime, sick leave, and unemployment. But to receive these benefits, they would lose the flexibility that so many drivers say is the reason that such a gig makes sense for their busy lives.

What’s worse, Uber and Lyft estimate that reclassifying drivers as employees would raise labor costs per employee by 20 to 30 percent. Companies can’t simply absorb input cost increases like that — almost certainly, it would mean higher fares, caps on the number of drivers that can operate at a time, and drivers having their hours scheduled instead of being able to log on at will.

These side effects have appeared before when states have attempted to force gig economy companies to follow outdated full-time employment regulations. When New York City imposed a minimum wage on rideshare drivers of nearly $28 per hour, Uber and Lyft responded by limiting the drivers who could log on at a time when there was low demand.

Ironically, the results of this regulation illustrate exactly why gig economy drivers are not traditional employees. In a normal market, drivers are effectively operating a (very) small business, deciding when to be “open for business” by weighing what hours would be most convenient to work against peak hours that would be most profitable. Guaranteeing a minimum take per hour to drivers that choose their own workload makes as much sense as guaranteeing a small business a minimum hourly profit.

If bureaucrats in California and other regulation-happy states truly seek to help gig economy workers instead of trying to smush them into the one model of work they can conceive of, they should focus on trying to create a new employment classification that expands opportunities for workers without simultaneously restricting them. After all, companies like Uber and Lyft have explored the possibility of providing some worker benefits, but have been held back in part by worries that doing so would strengthen the hand of regulators seeking to impose 20th century employment regulation on 21st century services.

Workers would therefore benefit from a new employment classification that preserved the flexibility and schedule-setting that independent contractors enjoy, while at the same time allowing them to be eligible for benefits that would not disrupt the gig economy work model — such as retirement benefits and reimbursement for gas or vehicle depreciation.

But California’s hamfisted effort to impose an outdated employment model on a new type of industry is as misguided as it would be bad for workers. Forcing rideshare drivers to conform to an employment classification built for 9-5 jobs is not pro-labor — it’s anti-innovation.