By Brittany Meiling The San Diego Union-Tribune
WWR Article Summary (tl;dr) If a Ca. bill is signed into law, it could end up forcing companies to offer gig workers benefits and protections that a normal employee would be granted -- such as minimum wage, paid sick days and health insurance benefits.
The San Diego Union-Tribune
A state bill passed by California legislators Tuesday is shaking gig economy giants Uber and Lyft, whose executives could now face industry-rocking restructuring.
But the tech titans are not the only ones affected by the bill. Several San Diego startups are now grappling with rules that could threaten their financial future.
The new legislation, called Assembly Bill 5, has cleared both the state Senate and Assembly and is on its way to Governor Gavin Newsom, who has previously pledged his support. Should the bill be signed into law, it would prevent many companies from classifying their workers as independent contractors rather than employees.
Proponents say the legislation will improve labor conditions for gig economy workers, forcing companies to offer benefits and protections that a normal employee would be granted -- such as minimum wage, paid sick days and health insurance benefits.
Opponents say the bill invokes outdated views of "employment," hampering the millions of Californians who want flexible work.
San Diego entrepreneur Jeremy Yamaguchi, CEO of on-demand yard work startup Lawn Love, said the bill has "terrifying implications" for gig economy companies if they're found to be misclassifying workers as independent contractors moving forward. Startups could pay heavy penalties to the state for violations.
"In that world, companies facing these risks could shut down entirely or radically change their business models," Yamaguchi said.
Employment law attorney Tyler Paetkau said contractor classification has been a "perennial issue" for these companies, but Assembly Bill 5 will change the game entirely. Employers used to have a lot of wiggle room to classify workers as independent contractors. This new bill now tightens the definition of an independent contractor. The most notable difference is that employers cannot use contractors unless the person's work is "outside the normal business activities" of the hiring company.
"It's nothing short of revolutionary," Paetkau said. "It will be almost impossible for a company to have independent contractors anymore."
The companies most obviously affected by the bill are massive tech firms such as Uber, Lyft and DoorDash, whose empires were built on a business model that classifies the bulk of their on-demand staff as independent contractors. It would be difficult to argue that Uber's drivers are performing work outside the company's core business (although Uber's chief legal officer Tony West is doing just that).
But the bill also affects a huge swath of smaller tech companies that adopted similar models. In the years after Uber's massive growth, startups swarmed into the market, all trying to replicate the tech giant's success in different niche areas. The wave of on-demand tech startups became known as the "Uber of X" trend, and San Diego saw its fair share.
Well-known local startups in this category include GoShare (the "Uber of moving trucks"), Veyo (the "Uber of medical transportation"), and HireAHelper, the "Uber of movers." These startups are joined by countless other "Uber of X" imitators throughout the state, highly concentrated in tech hubs such as San Francisco, Los Angeles and San Diego.
Contractor or not? Use the 'ABC Test' (A) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity's business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
This collection of startups could have a bumpy road ahead as they convert contractors to employees, or completely remake their business model and hiring practices.
Startup founder Shaun Savage said his company employs over 3,000 independent contractors who sign up as gig workers on his moving truck platform GoShare. These drivers own big trucks and use GoShare's app to find gig work, moving people's furniture and other items.
If the state forces GoShare to reclassify these workers as employees, it will require an overhaul of his business model. "The economics of it will have to be redesigned," Savage said, as he'll have to account for new costs.
Savage said his contractors currently average $47 to $71 per hour, plus tips. But if the state forces GoShare to reclassify these workers as contractors, he might have to reduce the hourly pay.
"Instead of money going to drivers, the money will go to the state in the form of payroll taxes or towards additional insurance requirements to satisfy the qualifications of hiring an employee," Savage said.
His biggest concern is taking on the expense of workers' compensation insurance, which he doesn't have to worry about with independent contractors.
While Yamaguchi said some startups will be negatively affected by the new bill, he believes his company will not. Lawn Love's gig workers largely operate as independent businesses, such as a gardener who works under a lawn-care LLC. But Yamaguchi has poured resources into preemptively reducing his risk -- both corporate and personal -- by hiring employment law attorneys and other counsel.
"I've lost sleep over the risk," Yamaguchi said. "It's an unhappy byproduct of building businesses in a world in which labor law is unclear and nebulous."
Paetkau, who often represents startups in Silicon Valley, said Assembly Bill 5 does not bode well for on-demand startups moving forward.
"There's a lot of these companies now, and a lot of them have been treading water," Paetkau said. "This is a bad omen, to say the least."
Some of the tech giants are not done fighting the bill. Uber, Lyft and DoorDash have pledged to spend $90 million to support a ballot initiative that would essentially exempt them from the legislation. Just Wednesday, Uber stated it would not treat drivers as employees, as executives believe the driver's work is outside the usual course of Uber's business.
If approved, Assembly Bill 5 will go into effect Jan. 1. ___ Distributed by Tribune Content Agency, LLC.