California's senate approved, with a 29 to 11 vote, legislation requiring companies like Uber and Lyft to treat all contractors like employees. According to The New York Timesthe bill should sail through the assembly, and Governor Gavin Newsom has already indicated that he will sign it.

It fixes the primary function problem

  • Use their own equipment
  • Set their own schedules
  • Are free to work for competitors
  • Are responsible for their own profit or loss

The one problem was that these drivers perform functions that are central to the business's mission. California's law solidifies this and says that because driving is the fundamental function of companies like Uber and Lyft, these people are employees.

This doesn't just affect these app-based employers. It could affect hairdressers, nail salons, franchise owners, and any number of other contract-based industries.

Other states may look to California as an example and follow. States are free to make stricter standards than federal ones, so they can essentially override the NLRB.

Not everyone is happy

Employment attorney Jon Hyman said this is

A huge blow to the gig economy, and its workers, most of whom thrive on the flexibility these gigs afford them. Not everyone wants the permanence of being an employee, yet this law seems to remove that choice.

Anecdotally, I ride in a lot of Ubers and always ask my driver if they'd prefer being an employee. No one has yet to say they would. To me, this is an issue being pushed by the labor movement for its own gains, with little regard for what the vast majority of gig workers actually want.

Employment attorney Kate Bischoff countered:

Positives include extending employee protections like minimum wage, overtime (really important for drivers), harassment, discrimination, and increased tax revenue.

Bischoff thinks it's unlikely that these changes will require companies to crack down on schedules and that overall the benefits outweigh the negatives.

In response to an earlier California ruling regarding beauty salons, Tina Alberino wrote at This Ugly Beauty Business that people who rent space in a salon are different from contractors who receive a 1099 for tax purposes.

  • In a proper rental salon, the renters collect their own money from their clients, the landlord receives rent checks from tenants, and the landlord receives 1099s from their tenants at the end of the tax year for the rent the tenants have paid.
  • An independent contractor is compensated by the hiring entity (the person or business that they have a work agreement with). The hiring entity issues the 1099 to the independent contractor. The hiring entity must be able to prove the independent contractor meets the standards set forth in the ABC test.

Theoretically, this new law shouldn't affect these types of establishments, but we will have to wait to see.

This change will increase costs

The New York Times reports that industry analysts say "on-demand companies like Uber and the delivery service DoorDash see their costs rise 20 to 30 percent when they rely on employees rather than contractors." Uber, which reported a $5 billion loss in the second quarter of 2019, cannot see costs increase without raising prices. (And their repeated losses probably mean they should have raised prices before this law goes into effect.)

While increased paychecks for employees are good, if businesses go under, everyone loses. And if companies start putting restrictions on these new employees to prevent them from working for multiple companies at once, employees stand to lose. I've been in more than one Uber where the driver was accepting rides from Uber, Lyft, and a traditional taxi company all at once. It's likely that if these companies have to treat their drivers like employees, they will prohibit them from working with more than one company at once.

As a gig worker myself, I like the freedom, and so I'm biased in that direction. I'm not the only one who values self-employment. I hope other states don't jump on the California bandwagon. If they want to consider it, they should wait a couple of years to see how it impacts businesses and the contractors-turned-employees. It may do more harm than good.