California Court Case and COVID-19 Disrupt the Relationship Between Drivers and Ridesharing Services

This week a California Superior Court ruled that transportation network company (“TNC”) titans Uber and Lyft have to classify drivers as employees, rather than independent contractors. The suit, spearheaded by the state’s Attorney General, sought to bring the two ride-sharing companies into compliance with Assembly Bill 5 (“AB 5”), which reclassified an array of “gig economy” workers as employees. When gig economy workers are reclassified as employees, they gain access to minimum wage requirements, overtime and sick leave, workers’ comp, disability insurance, and (importantly, in the COVID-19 era) unemployment insurance. Given those added benefits, employees can cost a company 20 to 30 percent more than an independent contractor, which is in part fueling opposition to bill and the ruling.

The decision comes after months of COVID-19 related disruptions that have cratered the ridesharing services at the core of Lyft and Uber’s business models. Lyft has reported a 61% revenue drop in the second-quarter of 2020, though it also reported an uptick in ridership in July. Uber reported a 75% drop in US ridership over April, May, and June of this year. Various lockdowns contributed to that drop – indeed, according to Uber’s own reports, nearly a quarter of its entire business comes from four US metro areas – NYC, Chicago, LA, San Francisco – along with its London operations. While the company has claimed encouraging signs from markets in nations like New Zealand, where the virus is under control, it remains to be seen if that success can be replicated in the US, where the virus is still spreading. In May, Uber announced two rounds of layoffs, cutting roughly 25% of its workforce (around 6,700 people), while Lyft cut 20% of its workforce in April.

Uber’s precarious financial situation makes its response to the Superior Court ruling all the more interesting – toying with a potential state-wide shutdown of their services, a least temporarily. In an interview, Uber CEO Dara Khosrowshahi indicated that if the company’s appeal of this week’s ruling fails, Uber may have to shut down service as they adjust to the new rules – with reductions in service outside major markets upon the service’s reactivation. That shutdown period also times out with the November election, where California voters will decide on Proposition 22, which would exempt ridesharing drivers from being classified as employers under AB 5. In a New York Times op-ed, Khosrowshahi has proposed a “third way” between employee and independent contractor. This system would require all gig economy companies to establish funds to give their workers cash payments to be used for benefits, with payouts based on the hours worked. By requiring all gig companies to pay in, individuals working for multiple companies at the same time remain covered as they switch from app to app. In response to this proposal, critics point out that Uber could already establish such a system, at least for their own drivers, if it wanted to.

California is far from the only place where ridesharing companies are being pushed to change the relationship the companies have with their drivers. In June, Seattle passed a law requiring paid sick time for TNC drivers during the COVID-19 crisis (the leave requirement would expire 180 days after the crisis has ended…). The Seattle bill grants one paid day of leave for every 30 calendar days worked (either full or part time). In Washington, D.C., a Lyft driver has challenged the company’s lack of sick days, arguing drivers should be classified as employees under city law. Indeed, as the pandemic spread workers across the nation have spoken up about the difficulty of obtaining any sick leave from gig economy companies, even when they showed symptoms of COVID-19.

Unemployment insurance has been a major focus in these disputes, especially as drivers have been unable to work due to lockdowns or COVID-related reductions in demand. Traditionally, when drivers are classified as independent contractors, they lose the ability to claim unemployment, as their “employer” doesn’t pay into the system. At the start of the COVID crisis, Congress set up a separate unemployment fund for self-employed workers, though that fund ran out at the end of July. Even while the funds were available,  however, many gig workers had a hard time obtaining them, as existing state unemployment systems struggled to adapt to new rules while being slammed with claims from millions of people newly out of work. In California, the issues surrounding Assembly Bill 5 complicated the process, as the Federal funds were marked for people classified as independent contractors, which, thanks to AB 5, now did not include many gig workers. Drivers in New York, frustrated at their inability to obtain unemployment funds sued the state government, and have won, at initially, building their arguments off two earlier rulings that deemed gig workers eligible for unemployment benefits. Part of the disputes in both California and New York involve the lack of earnings data for drivers, which the state needs to calculate their unemployment eligibility, with a lawyer for the State of New York accusing Lyft and Uber of “playing games” to prevent turning over said data. Elsewhere, the Pennsylvania Supreme Court ruled on a similar case – finding that an Uber driver was not “self-employed” for the purposes of unemployment benefits, while the Massachusetts A.G. has also recently brought suit to reclassify Uber and Lyft drivers as employees.

As the pandemic drags on, it’s hard to know what will happen next. The shortfalls of the current system have been made manifest – something clearly needs to change. Perhaps that could come in the form of Uber’s proposed “third way,” but such a system would need to be much better defined than it is now to prove it could offer a level of benefits comparable to those offered to employees. At the same time, if gig workers are to be counted as full employees, could that limit the entry of new gig companies? The massive growth of companies like Uber and Lyft was fueled in part by the cost savings that came from using independent contractors. Could new companies hope to cut into existing or new markets while also providing greater employee benefits?

For now, I’d say it’s more important to focus on the existing problem. Uber and Lyft are sophisticated technology companies, and both should be more than able to adapt their system to make their drivers employees. Given the COVID-19 related reductions in demand, the time seems right for them to make that change everywhere, not just in California. After all, according to their own plans, Uber won’t be dealing with human drivers forever, so future employee expenses will supposedly reduce with time. And while the pandemic may have harmed Uber’s ridesharing, it has helped grow its delivery service, UberEats. Even if automated vehicles replace gig drivers, they will be less able to replace workers for services like TaskRabbit or Instacart, where human labor is still central. And with expanded government-based safety nets seemingly a distant possibility, for the time being, workers will still need employer-based benefits of one form or another. Just as ridesharing companies disrupted the way people move through the world, it seems the time is right to disrupt the relationship between those companies and drivers that form the core of the TNC workforce.