Ride-sharing services have fought an uphill battle to become part of the public transportation lexicon. However, all their successes are about to be challenged thanks to a new California bill set to be voted on in the fall. As powerful as Uber and Lyft are, this new legislation could be a harbinger of a tough restructuring ahead.
So what is this new legislation? How did Uber and Lyft get here? Why is it seen as impactful to these companies? And where do these companies go from here?
Where They Began
Uber was founded in 2009 and Lyft followed 2012. Both were started by founders interested in, based on stories they heard or experiences they had, how to make commuting better. Each company was received well by investors, with Uber receiving $32 million in 2011 from their Series B funding round (Business Insider) and Lyft $15 million for their Series B funding round in 2013 (CNN).
From there, both companies continued to draw big investments, expanding their business reach both in terms of location and services provided. Even as both Uber and Lyft gained in public popularity and earned the trust of investors, neither company have yet to turn in a profit from their business. Uber even reported a $5.2 billion loss this past quarter alone, although this number may be grossly inflated from one-time sell offs related to their IPO.
Even with the continued losses, both companies enjoy a large user base and even went public earlier this year.
Where The Trouble Started
In a sense, the business models of each company that drove their success led to the issues they face. One way the companies saved money was by classifying their drivers as independent contractors. This means that drivers were not guaranteed the same rights or benefits as employees.
To be fair, this is not unique to Uber and Lyft. This particularly tactic is part of the larger gig economy, one which often hires independent contractor workers to do temporary jobs.
During their tremendous growth period (and even to this day), both companies classified their drivers as independent contractors. Doing so allowed them to save money as they would not need to pay for employee benefits, among other things. While beneficial for the company, drivers became increasingly frustrated by the employee classification. This even lead to lawsuits looking to establish drivers as employees rather than as independent contractors (Forbes). Both companies have resisted these calls thus far.
Where They Are Now
Assembly Bill 5 (AB 5) stands as one of the biggest hurdles for the burgeoning companies. According to a report by Vox, AB 5 will enforce stricter guidelines when it comes to employee classification. To be classified as an independent contractor rather than as an employee, employers will need to prove that the person meets all three criteria of the “ABC Test.” From Patriot Software, the criteria are as follows:
1. The worker is free from the control and director of the hirer in relation to the performance of the work, both under the contract and in fact.
2. The worker performs work that is outside the usual course of the hirer’s business.
3. The worked is customarily engaged in an independently established trade, occupation, or business of the same nature as the work for the hirer.
Given that gig workers (drivers in particular) are an essential part to the operation of the business, Uber and Lyft would have to classify their drivers and employees under the “ABC Test.”
AB 5 has already passed in California’s State Assembly and is set for a vote in the state Senate in the coming month. In an effort to dissuade the public, the companies have pushed a narrative that employee status would be detrimental to drivers because it would end up limiting the freedom to work when and how they want (The Verge). Additionally, Uber has opened a petition promising $21 minimum wage while driving a passenger(s), benefits including paid time off, sick leave and injury compensation while on a drive, and empowerment through collective action.
Critics have questioned Uber’s motives, noting that “nothing in the law would stop the companies from offering schedule flexibility to employees” (Vox). Additionally, Uber and Lyft have committed $60 million to fight AB 5 with a 2020 ballot initiative focused on creating a classification specific for drivers (The Guardian).
Uber and Lyft await the outcome of AB 5, although the bill is wildly expected to pass. Certainly, if the measure were to pass without substantial changes or additions, Uber and Lyft’s entire business model may have to change. If all their drivers were classified as employees and were given benefits, both companies would lose more money than they are now.
Certainly, the conversation around employee status has been started and changes, even if they are not as sweeping as AB 5 and are more limited in scope like those promised in the Uber petition, will likely be made. How Uber and Lyft, as well as other companies steeped in the gig economy, tackle these issues remain to be seen.