#2 - AB5
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📰 1 topic: AB5
AB5 is a California law, in effect as of January 2020, that makes it harder for companies to classify their workers as independent contractors (as opposed to employees). Under this law, to hire a worker as an independent contractor, businesses must prove that the worker (a) is free from the company’s control; (b) is doing work that isn’t central to the company’s business; and (c) has an independent business in that industry. If a worker doesn’t meet all three of these conditions (the so-called ‘ABC Test’), then he/she must be classified as an employee.
As one can imagine, Uber and Lyft are particularly up in arms about this piece of legislation, and I will mainly be examining this law through the lens of Uber and Lyft.
The arguments in favor of regulating labor platforms under AB5:
Intentional misclassification and worker’s rights. There was a recent class action of 385,000 drivers against Uber for intentional misclassification as independent contractors. The companies intentionally misclassify in order to cut costs (i.e., avoid workers’ compensation, insurance, employment taxes, etc.,) and gain a greater competitive edge over companies that treat their workers as employees. Workers lose basic protections like the minimum wage, paid sick days and health insurance benefits. Contractors also can’t join a labor union since only employees have the right to do that.
Tax revenues. Companies that misclassify workers avoid paying their fair share of Social Security, Medicare, and unemployment insurance taxes and avoid providing state workers’ compensation insurance. The state of California estimates that the annual state tax revenue loss due to misclassification is as high as $7 billion.
Scaffolding the gig economy. Imagine a world where we are free to work wherever and whenever on whatever we want. If we are barreling towards that future, we should lay down the ground rules for worker’s rights today. More and more companies are predicating their business models around independent contractors. Given that many startups are located in California, regulation of these new companies will ensure worker protection from the get-go.
Moral imperative. Uber and Lyft set fares, controlled worker behavior through algorithms, and unilaterally (and sometimes inexplicably) terminated workers from the app. Individual workers bore many of the traditional risks of business—providing their own car, phone, hybrid car insurance, and gas—but had very little control over the business itself. An argument can be made that it is morally necessary for workers to have more power to push back against such bad practices.
The arguments against AB5 mainly focus around how companies will respond to a huge increase in labor cost. The legislation is incredibly costly to Uber and Lyft (additional operating loss of $500m and $290, respectively), and let’s not forget that Uber and Lyft are still not profitable yet. These arguments include:
Higher costs to consumers. The platforms could pass costs off to consumers.
Decreased job opportunities and increased layoffs. In a pre-AB5 world, the decision to work was made by the workers themselves, based on their own evaluation of whether the work was worthwhile for them. In the post-AB5 world, employers will only keep those workers who produce more value than they cost the company. In fact, AB5 has already resulted in massive layoffs. Vox Media cut more than 200 California freelancers, and the transcription service Rev told its freelancers that it would be leaving California.
Decreased flexibility for workers. In response to higher labor costs, Uber and Lyft could limit drivers to work under 40 hours / week (to avoid paying 1.5x for overtime) or under 30 hours / week (to avoid having to pay healthcare costs). Because of the lower liquidity of the ride-sharing market, Uber and Lyft would need to manufacture higher liquidity by imposing certain rules. For instance, they might mandate when and where drivers can and cannot drive and even require drivers to accept every ride assigned to them, no matter the destination.
Unintended consequences to other industries. A couple of examples: The music industry could be driven out of California since independent musicians and recording requires one-off freelance work; and the trucking industry’s owner-operator model could be invalidated. Additionally, while large companies have more resources to throw at litigation aimed at protecting themselves, smaller companies don’t have the wherewithal to bring this piece of legislation to court or to pivot. Indeed, Uber and Postmates filed a lawsuit shortly before the law went into effect, declaring the law unconstitutional and seeking exemption.
Personally, I feel like AB5 paints with too broad a brush. I agree that workers’ rights are a huge problem in the United States, and the future of work will depend on people having both security and flexibility in the job(s) they work. The passage of AB5 will likely result in decreased flexibility and increased security within a particular job while also constraining the amount of available jobs across sectors. While such a solution might make sense to Uber and Lyft, I’m hesitant this is the right solution broadly. I’m more partial to specific, tailored legislation or agreements that would have targeted Uber and Lyft in particular.
What are your thoughts? What arguments am I missing?
📚 5 articles
Quibi raises $400m. Star-studded Quibi executives Jeffrey Katzenberg and Meg Whitman are making a huge bet on short-form mobile videos. So big of a bet that they’re raising $400m and spending $1bn this year alone on a product that hasn’t been released yet. On one hand, kudos — on the other, this is kinda’ scary and antithetical to how software startups normally approach product development and release. Katzenberg has even admitted, “I think it's the biggest idea that we've ever done... I just know it's going to work." Also, check out their promo video, it’s pretty cool.
Chinese scientist who genetically altered babies is jailed. Technology is a force multiplier for both good and bad, but I’m afraid that multiplicative factor will get so large that we can’t afford one bad apple. Is there a way to prevent this scientist from acting against the law in the first place?
Oyo’s toxic culture. Dangerous growth mentality sometimes results in too many cut corners. Of course, the question is when your necessary obsession with growth will cross the line into impropriety. Where this line is drawn differs by industry (medical in Theranos, pure software in Google during the old days). The more your company rubs up against the physical world, the slower you probably need to move. Also, I wonder how much of a role Softbank ($1.5bn investment) has here. Softbank seems to pick founders with empire-building ambition and believe in some ‘capital-as-a-moat’ / ‘get big fast at all costs’ mantra.
US CTO on AI development. Honestly, this isn’t too interesting of an announcement, but I think it is an important one. AI has huge potential for abuse, and the US should explicitly aim to be world leaders of AI development.
Blockchain + olive oil. I’m laughing. But comedy aside, this is pretty cool. I wonder what’s next? Innovation tends to enable / create things we want that we never knew we wanted in the first place.
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