California's Assembly Bill 5

Are Uber and Lyft misclassifying their workers as independent contractors instead of employees? In order to protect the workers of the gig economy, governor Gavin Newsom signed Assembly Bill 5 into law this September. The classification of workers is difficult, and what companies put on contracts and what people sign may not always be correct. Under the IRS rules, employment status is determined by 20 factors, including whether companies control how employees work. AB 5 challenges this by assuming all independent contractors as legal employees of the company unless the company can prove that they meet the standards for hiring independent contractors. One of these requirements is the worker performs tasks outside of the company's usual course of business. Even though it is hard to see a way for Uber to argue that hiring drivers is not essential to their business model, Uber's lawyers have pledged to continue classifying their workers as independent contractors.

At the heart of this debate is the benefits that Uber/Lyft drivers should receive. As employees, drivers would receive federal and state tax withholding, anti-discrimination, health care, pension, worker’s compensation, and unemployment insurance obligations. However, the business model of Uber/Lyft involves hiring workers for less money, which is partly achieved by not having to follow guidelines on employee rights. This may be why Uber/Lyft have very high turnover rates in employment. If Uber and Lyft were forced to classify their drivers as employees, it may crush profits or result in these companies withdrawing their services from California. AB 5 has a lot of pros and cons and it will be interesting to see how these gig companies respond when the law goes into effect next year.

Sources: https://www.forbes.com/sites/robertwood/2019/09/11/california-law-making-gig-workers-employees-could-hit-uber-lyft--others/#2dd647766586

https://www.investopedia.com/california-assembly-bill-5-ab5-4773201