A law that forces many companies to hire freelancers as employees went into effect early this year in California. However, the main targets of the law — gig economy giants like Uber and Lyft — have largely ignored it. That may change over the coming months. And if it does, it could cause sweeping change for workers and customers of Uber, Lyft and dozens of other now-ubiquitous services. 

Depending on who you believe, the upcoming change will either improve working conditions for millions of people — or put millions of people out of work. It may make popular services, like ride share, grocery and food delivery, safer and more reliable — or more expensive and scarce. 

What exactly is going on? And how might it affect you?

Sweeping change for Uber & Lyft

Two main things are happening. Both harken back to the January 1st start of AB-5, a California law aimed at forcing many companies to hire freelancers as employees.

The California Attorney General recently sued to force tech companies to comply with the law. Tech companies launched a ballot initiative to overturn it. 

Both parties maintain that decisions should land in the next few months. Those decisions will largely determine whether this is a new beginning, or the beginning of the end, for Uber,  Lyft and much of the gig economy.

To explain…

AB-5 was aimed at technology giants that operate their businesses by connecting freelancers and customers through their apps. In addition to Uber and Lyft, these companies include Postmates, Instacart, DoorDash, GrubHub and hundreds of others. All of these companies welcome anyone who meets some basic requirements to flip on a smart-phone application and go to work.

The companies say that the individuals who use their smart-phone apps are independent contractors, able to determine their own hours and be responsible for their own expenses. But pay is usually set by the apps, often by way of vague and ever-changing formulas. Workers have no control over the pay formulas, but can decide whether to accept or reject any job that’s presented to them.

However, a California Appeals Court ruling dramatically expanded the definition of an employee. And the state legislature passed AB-5 to put this expanded definition into state law. This rule arguably turned roughly one million California freelancers into employees as of January 1.

That’s wreaked havoc in a wide array of industries that have been swept into law’s mandates. But the gig economy companies that it targeted maintain it doesn’t apply to them.

The heart of the dispute

How so? The law created a three-part test to determine whether you’re an employee or a freelancer, and most gig companies easily meet two of the three tests. The dispute is over the third test. This says you can only be a freelancer if you are in a substantially different business than the company that you work for. 

Thus, a marketing company must hire its marketing consultants, but it doesn’t have to hire the janitor.  Likewise, a transportation or delivery company must hire the people who drive and deliver for it.  

So what’s the dispute?

Gig economy companies say they’re not in the business that you think they are. Uber and Lyft, for instance, contend they’re not transportation companies. They are in the business of developing software. 

To be sure, their software applications are used by people who want to get rides — and by people who want to drive for pay. Uber and Lyft collect a portion of the revenue earned from those rides, too. However, the company says that’s essentially a license fee for using its software. 

The government disagrees.

Lawsuit pending

California Attorney General Xavier Becerra, along with several city attorneys, have filed suit to force Uber, Lyft and others to hire their drivers. That would force the companies to pay drivers at least minimum wage, provide overtime pay and any other legally-mandated benefits. It also would require these companies to pay a litany of taxes — Social Security, Medicare, unemployment and worker’s compensation.

That suit is set for an early August hearing. If the state wins, the companies will have to hire their workers or withdraw from California.

Not surprisingly, other state governments are carefully watching to see whether they should follow California’s lead.

Why fight?

Taxes and other costs associated with hiring employees often amount to 20% to 40% of pay. Mark Potter, a  San Diego attorney representing 1,600 drivers who have filed employment claims against Uber and Lyft, says the number could be higher in this case. He estimates that drivers are owed about twice what they were paid. 

“We’ve found that if a driver earned $50,000, he’s usually owed $50,000 in back wages, mileage, overtime, and penalties,” he says. He has a calculator for prospective litigants to use on his website that factors in previously uncompensated time and mandatory breaks, among other things. 

Impact on customers

Most gig companies are already unprofitable. If they have to shoulder added costs of hiring drivers, they would need to pass the higher costs onto customers or go out of business. That could make it more difficult and expensive to snag a ride or get your groceries delivered. 

And that starts a whole downward spiral of diminished demand for both rides and drivers that could gut gig companies, says William G. Hamm, managing director of the Berkeley Research Group. (Berkeley was commissioned by the ballot measure’s proponents to study the impact of AB-5.)

The bottom line: “Costs will go up and wait times will increase,” he says.

Is it good for drivers?

The impact of going from freelancer to employee would likely be mixed for drivers, too.

On the bright side, employees arguably have more job security than freelancers. They also get paid for every hour they work, plus overtime, when they work more than a set number of hours in a day or week. The companies would also have to pay their expenses and the employer’s half of Social Security and Medicare taxes.

However, most Uber and Lyft drivers maintain that they earn far more than minimum wage now. One of the ways that companies could manage their employment costs is to drop driver pay to the state-mandated minimum.

Company vs. driver control

Then too, what drivers have now is control over when and how much they work. That is likely to end if drivers become employees. After all, most companies manage employee schedules and restrict overtime. For many drivers that’s a deal-killer.

Consider Darryl Johnson, a Los Angeles truck driver.  His trucking schedule is unpredictable — reliant on when cargo is received and traffic. Thus, he can’t commit to another schedule. But as a single dad of 6, he needs a side hustle to make ends meet.

Now, he can simply flip on his Lyft app when he has the time.

“If I had to clock in at a particular time, I wouldn’t be able to do it,” he says. “I would have to go back to having just one source of income. And I don’t know how anyone can live on just one income in Los Angeles.”

New beginning?

The supporters of the ballot initiative called the Protect App-Based Drivers & Services Act maintain that there’s a better alternative. The act, which is supported by big tech companies, including Uber and Lyft, would restore freelancer status to delivery and ride share drivers.

In exchange, it would provide them with guaranteed pay and some benefits. It would also address rider safety concerns by requiring regular driver background checks, safety training and other measures.

This too is a sweeping change from the way things work today. It would make now-obtuse driver pay a bit more predictable and provide an economic safety net for those who drive more than a few hours a week. It could also standardize the ride experience — a bit more like when you hop in a cab.

This could also cause a hike in fares, but probably not as steep a hike as would be necessary if drivers were all deemed employees.

Who wins?

What will happen in the end is anyone’s guess at this point. Gig economy companies have been effective in winning court cases over the employment status of their users so far. However, they’ve yet to be tested with a law as sweeping as AB-5. 

Meanwhile, the fate of the ballot initiative will be in the hands of voters this November. 

“It’s hard to say where all this goes,” says Hamm.