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Uber and Lyft, who for years were able to skirt minimum wage, payroll tax and other requirements, have found themselves on a dead-end street thanks to action by the California Public Utilities Commission (CPUC). In a serious defeat for the mega rideshare companies, a new ruling has been passed forcing them to treat drivers as employees. This ruling, which came down in a June 10th order from CPUC, forces the rideshare companies to follow a law signed into effect last September.

In this post, we’ll examine the CPUC’s decision along with the original California law, Assembly Bill 5, and then talk about the ramifications for both drivers and passengers. Buckle up!

What is the Difference Between Employees and Independent Contractors?

The original bill, Assembly Bill 5 (AB-5), was signed into law in September of 2019. The bill codifies a strict assessment for when companies are allowed to classify their workers as independent contractors, as opposed to employees. Specifically, it put into place a three-part test:

  1. Is the worker free from direction for the hirer to perform their work as they want?
  2. Is the worker performing a task outside of the hirer’s normal course of business?
  3. Does the worker regularly perform the same task for pay outside of the purview of the hirer?

This “ABC test,” as it is known, is much clearer and narrower in scope than previous guidelines. The goal of AB-5 is to ensure that companies like Uber and Lyft can’t have a huge cadre of independent contractors propping up their business. If a worker is given very specific rules, takes part in a standard part of the business, and performs a task just for the company, then AB-5 dictates that they should be considered an employee.

AB-5 is a big win for rideshare drivers and a variety of other gig economy workers. However, in many ways, it’s also a win for the customers of these companies.

The History of Law AB-5

AB-5 is designed to protect gig workers from predatory practice. Companies like Uber, Doordash, and others previously classified their workers as independent contractors. This allowed the companies to avoid laws requiring paying minimum wage, payroll tax, health insurance and more.

Workers for these companies are frequently economically vulnerable. When demand for these services decreases, people making their living from rideshare driving lose their livelihood. However, they are unable to file for unemployment in many cases because they are not considered “employees” in the first place.

On top of that, Uber, Lyft, and other gig economy companies neatly sidestep paying taxes on these workers. Independent contractors are responsible for paying the entirety of their income tax. However, they are taxed at a lower rate than giant corporations. The result has been estimated as an $8 billion loss in potential tax revenue for California.

AB-5 was put in place after lawmakers decided this was unfair and unjust. The bill’s strict definition of who may be classified as an independent contractor is a crackdown on gig economy companies’ evasive practices. It’s also something Uber and Lyft aggressively lobbied against.

When the bill was signed into law last year, Uber and Lyft explicitly refused to reclassify drivers to meet the AB-5 requirements. As a result, city attorneys general from San Diego, San Francisco, and Los Angeles banded together to sue them and force compliance. That’s where the recent order comes into play.

The June 10th, 2020, CPUC Ruling

On June 10th, the California Public Utilities Commission, the regulatory agency which covers “transportation network companies” like Uber, specifically stated that drivers for these companies are covered under AB-5. Prior to the order, no specific companies or industries had been included in the order.

This order does not change AB-5 itself. Instead, it serves as a reminder to these companies of their legal obligation. By specifying that transportation network company drivers are considered employees, not independent contractors, it places Uber and Lyft in a tight spot.

If they continue to avoid reclassifying their workers, they will no longer be able to claim they are not covered by AB-5. Instead, they will be actively violating the law. How Uber and Lyft will react remains to be seen.

The Ripple Effect of the Ruling Protecting California Drivers for Hire and Gig Workers

The primary goals of AB-5 are to protect drivers and other gig workers. However, the ripple effects of this law are intense. Riders will see benefits and protections from this law as much as drivers.

While gig companies have been classifying workers as independent contractors, they have kept themselves safe from consequences. They avoid insurance costs, fleet maintenance costs, and tax penalties. Most of all, they avoid legal penalties.

The difference between independent contractors and employees is stark in the case of lawsuits. If an employee of a company is negligent in the course of their job, the injured party can sue their employer for damages. On the other hand, if an independent contractor is negligent, the injured party can only sue the contractor. By classifying workers as independent contractors instead of employees, companies protect themselves from lawsuits.

For example, if an independent contractor driver gets in an accident while driving a passenger, the passenger can only sue the driver. This seriously limits the potential damages injured passengers might receive. Regardless of the assessed damages, an independent contractor only has access to their own personal funds in the end.

On the other hand, consider what happens if that same driver is considered an employee of Uber at the time of the accident. Instead of suing the driver, the injured passenger can sue Uber itself. Damages can meet the injured party’s needs, because Uber has more assets than an individual driver.

As a result, riders have a better safety net. If something happens during a rideshare ride, the passenger has the ability to sue the company, not the driver. This is a serious check on the hiring processes of Uber and Lyft and will encourage safety practices in the long term. When injured passengers can sue the company for punitive damages after being harmed by a driver, these businesses are incentivized to hire safer employees.

Uber and Lyft have spent years without facing taxation or even serious regulation. While this has been great for the companies, riders and drivers alike have suffered. AB-5 and the recent CPUC order have been implemented to help people have their needs met. As a side benefit, Uber and Lyft are finally becoming subject to legislation and facing consequences for safety issues.

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