AB 5, the new law in California that heavily curtails the use of "independent" workers rather than traditional employees. There are some exceptions in certain types of professions that have traditionally been independent. Not all are happy. Freelancer writers and photographers, for example, face significant restrictions on how many times in a year they can work for a given publisher.

But their concerns and displeasure probably pale in comparison to what gig economy companies like Uber and Lyft are experiencing. And they and DoorDash have planned a statewide referendum campaign, as the Los Angeles Times reported.

This is a do-or-die effort to rescue their business in California. Because it's not clear whether such companies, which frequently are poster children for the "grow like crazy and lose lots of money while you're at it" clue, can survive if they can't avoid payroll taxes and push expenses onto contract workers.

Gig businesses typically work under the assumption that they are platforms--marketplaces, really--so parties who need services and who provide them can get in contact, make arrangements, and ultimately enable payment. There are many of these marketplaces with different focuses: content creation, food delivery from restaurants, hotel-like temporary places to stay, odd jobs, or what have you. The platform, in theory, is a conduit for the transaction and takes a cut.

Under prevailing labor law and standards, usually the independent worker provides a service that isn't part of the normal operations of the platform and does it in their own way and under their own supervision.

With some of these platforms, that's how things work. Others, though, don't have such clear boundaries. For example, an independent person is a business owner and would be expected to do such things as maintain the relationship with the end customer or negotiate their own rates. But in the case of a Lyft or Uber and some of the other gig platforms, things get blurry.

The contractors are told what fees can be at any given time. They may have to meet requirements of equipment and behavior. And many get into this without understanding the challenges of running a small business.

Speaking specifically of ride-hailing drivers, UCLA researchers found that in Los Angeles, almost half of the drivers felt they weren't getting the pay they deserved because companies regularly shift prices and terms. Forty-four percent have such thin margins that they reported difficulty paying for such necessities as gas, insurance, and car maintenance.

Drivers were often unrealistic in terms of what they wanted: a combination of wanting to control conditions and pricing, like a business owner, but also wanting worker's comp and healthcare coverage, although that's not part of the deal if you run your own small company.

At the same time, the gig companies want to avoid having official employees because it means they don't pay for the half of FICA that employers do (the independent businessperson is responsible to pay both parts). There's no worker's comp insurance, no healthcare payments. And there's no need to pay a minimum wage on top of the cost of buying or leasing a vehicle and paying for fuel, maintenance, registration, and insurance.

So far, companies like Uber and Lyft are far from profitability, although Lyft has started to say that, in terms of adjusted earnings (not counting interest, taxes, and depreciation), it expects to reach "profitability" by the end of 2021, according to the Wall Street Journal.

Even if true, let's wait until real profitability, under generally accepted accounting standards, comes about.

Should all those drivers in a big state like California suddenly be treated as employees, expenses for the companies are going to skyrocket. Several major things are likely to happen:

  1. The cost of rides are going to jump sharply, because the companies will need more money.
  2. The companies will try to restrict hours for most drivers (often not a problem, as many deliberately work only part time) to avoid liability to provide health insurance.
  3. The platform companies will also start exercising more control and requirements to be sure they have the people driving when they want them.

It will be a different experience for everyone involved. Here's how some of the platform companies are responding, as the Times reported:

The proposal, which Uber, Lyft and DoorDash intend to qualify for the statewide ballot next November, states that an "app-based driver is an independent contractor" as long as a series of conditions are met by a company. If approved by voters, the initiative would also enshrine in state law a number of perks for those workers, including a minimum amount of pay as well as insurance to cover work-related injuries and auto accidents. And it lays out details for healthcare subsidies, protections against on-the-job harassment or discrimination and a system to enforce some workplace rights.

The companies are intelligently not trying to simply toss out the effects of AB 5. Instead, they're pushing a few things the drivers might want in hopes of getting support to pass the waiver. All tips go to the drivers instead of whatever amount the companies decide to pass on. The minimum wage will be 20% above California's general minimum wage. Drivers would get 30 cents a mile to cover expenses, adjusted afterward for inflation and there would be a pooled healthcare insurance subsidies--82% of the least expensive plan under the state's health insurance exchange--so long as the driver worked a minimum of 25 hours a week, even if split driving for multiple companies.

But the backers of the original bill don't like the idea of the change. The extras may also prove too thin to really get driver support. For example, 20% above the state minimum wage plus 30 cents per driven mile might not sufficiently cover the expenses. New York City instituted a minimum wage for rideshare drivers that was $26.51 gross or $17.22 after expenses, which makes it look as though the expenses could run more than $9 an hour. Given that California's minimum wage is currently $12 an hour, the drivers would see $14.40 an hour, or an extra $2.40 an hour. That would mean the need to make up about $9 an hour, which--at 30 cents a mile--would require covering at least 30 miles in an hour. For taxi work in city traffic, that's iffy.

California, at least, is only one state, although a big and important one for the business. So maybe the companies can pull this off. Because if not, the extra costs to have a lot of employees could be more than an inconvenience.