California’s House of Representatives recently passed a bill, AB5, which would notably disrupt the entire ride-sharing economy as we know it. The law proposes to change Uber and Lyft drivers from “independent contractor” to “employee” status. While a seemingly innocent change, the proposal has the power to destroy tens of thousands of drivers’ jobs.
Since their creation a decade ago, ride-sharing apps have made travel easier and cheaper, making ordering an Uber or Lyft from your phone ubiquitous in cities around the world. However, despite the immense success and societal impact these companies are having, states like California have gone on the offensive, challenging their very survival.
Barclays estimates that the reclassification bill would cost both Uber and Lyft an extra $3,625 per driver. This includes the taxes, training, and benefits that involves hiring an employee compared to having a contractor. In total, the report concludes the increase would add $500 million in losses to Uber and $290 million to Lyft.
Since California represents 17% of Uber rides and 24% of Lyft rides, the Golden State has the power to devastate ride-sharing’s viability. If California passed the bill, it would set a dangerous precedent for allow other states to follow. Nationally, if all Uber drivers were converted to employees, the company would incur $2.7 billion in additional costs per year – nearly the entirely of its operating revenue. Already, Uber lost one billion dollars in the first quarter of 2019, and adding more costs could potentially put both companies out of business.
Moreover, not all drivers are happy with the switch. Transferring from independent contractor to employee status would decrease the flexibility that comes with freelancing. Lyft stated in a statement, “Many are moms, students, seniors or veterans and 75 percent of them drive less than 10 hours a week.” With flexibility being one of the biggest reasons people work for ridesharing companies, the bill would exclude more people from earning an honest living and deny them the option to freelance.
Sky Siegel, who operates a cannabis business in Studio City, California, said his fleet of drivers were split on the issue. The Atlantic reported that when his company switched to making his drivers into employees, not everyone was happy, stating that “some [drivers] left because Siegel can’t yet afford to offer them benefits, so he is limiting employees to 30 hours a week.” While for some of this seems like the perfect option, many can’t work those hours and will have to pursue work elsewhere.
Instead of foisting this change on Californians, policymakers in Sacramento should proceed with caution and learn from what happened in New York.
Last year, New York City mandated a minimum wage of $17.22 an hour for ride sharing drivers. However, with increased wages came increased prices. The high prices drove customers away as demand for the service decreased.
A recent Bloomberg report showed that in New York City, Uber had 8% fewer rides in May compared to March this year. Similarly, Lyft also took a hit, stating, “riders will see increased fares, which may lead to fewer rides.” Drivers too had their benefits reduced as ride-sharing companies had to cut back on benefits which included limited-time bonuses and promotions.
Further, only premium Uber Black drivers with ratings above 4.85 will be allowed to drive because of the increase. Starting in September 2019, the allowed vehicles drivers can use will also narrow, most likely to newer, more luxurious models that only the richest drivers can afford.
Laws like these end up hurting drivers more than helping. With fewer rides, drivers will be making less trips which will in turn hurt their earnings – the exact opposite of what was supposed to happen.
Perhaps the most tragic part is how the poorest of riders will now be pushed out of the market. An Uber spokesperson said, “the impact of increased fares has been most visible in the growth of pool trips.”
If ride-sharing becomes too costly for many consumers, they may have few alternatives. A WUSA9 undercover investigation found taxi drivers were 25 percent less likely to pick up black passengers compared to white passengers. In contrast, a UCLA study found that most Lyft trips per capita occurred in low income areas, where car ownership is lower compared to more affluent neighborhoods.
Unfortunately, as ride-sharing prices increase, rides will be only available to the middle- and high-income customers; instead, policymakers should help make these services accessible to all.
Uber and Lyft provide immense benefits to drivers and riders alike, making travel quick and affordable. As California considers regulating the ride-sharing economy, it needs to reconsider the consequences, as it will make ride-sharing unavailable to those who need it the most.