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Uber, Lyft’s fight against California AB5 set to be long-term headache

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With California’s expansive gig-economy law, which could bankrupt Uber and Lyft by some estimates, set to take effect at midnight on January 1, the companies have ratcheted up their offensive.

Uber and Postmates, two members of a coalition of companies formed to fight the new rules that could force many independent contractors into employment status, filed a lawsuit in federal court on Monday evening calling the law “irrational and unconstitutional.”

It’s the first step in what is likely to be a lengthy battle between state regulators and the companies who rely on independent contractors to power their ride-hailing and delivery businesses.

“This bill represents a much broader topic that will be a major point of contention for investors over the long term,” Daniel Ives, an analyst at Wedbush Securities, said in a note to clients Monday.

“In our opinion driver classification will continue to be a lingering risk to the entire ride-sharing industry going forward with the possibility of this being adopted at the state level across the US,” he said.

The law would enshrine a three-part test to determine whether or not workers can be legally classified as independent contractors. Those workers are key to digital business models because companies can avoid paying certain benefits, like minimum wage, overtime, and insurance.

That test says a worker is an employee unless the employer proves that: 

  • (A): The worker is “free from the control and direction” of the company that hired them while they perform their work.
  • (B): The worker is performing work that falls “outside the hiring entity’s usual course or type of business.”
  • (C): The worker has their own independent business or trade beyond the job for which they were hired.

Labor experts previously told The New York Times that Uber and Lyft would both likely be required to classify drivers as employees under the law. As a consequence, their associated costs could rise by hundreds of millions of dollars, analysts at Barclays estimated.

As an alternative, Uber, Lyft and the rest of the consortium of companies have proposed a ballot measure, with the goal of voters opting later in 2020 to spare companies from the law, and put $90 million behind it.

That plan would include a minimum-wage guarantee for time spent on a trip as well as $0.30 for expenses, a healthcare stipend, insurance, and protections from discrimination and harassment.

In order to make the 2020 ballot, the coalition will need to obtain roughly than 650,000 verified signatures on a petition for their proposal, organizers said. June 25 is the “do or die” deadline for submitting the proposal, adding that all of the companies remain open to “legislative discussions” with lawmakers. 

“We don’t see the legal headwind dissipating in the near term,” Ives said in the note to clients. “However we do see added risk from aiming to take a greater share of the fare from drivers and expect that the more the companies push on this front, the more drivers will fight back and protest, increasing the likelihood of regulations.

“In sum,” he said, “this lawsuit is a microcosm of fighting possibly the largest risk in the ride-sharing industry and a situation we will be closely watching over the coming months as it plays out in the courts.”

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