California Labor Bill, Near Passage, Is Blow to Uber and Lyft

SACRAMENTO — A pack of Teamsters fanned out through California’s Capitol building last week, marching into legislators’ offices and pressing them to pass a bill that would force Uber and Lyft to treat their drivers as employees. The measure, Assembly Bill 5, would entitle gig workers to protections like a minimum wage and unemployment benefits. “Yes on A.B. 5! Yes on A.B. 5!” they chorused.

The push was one of several door-knocking campaigns coordinated by labor groups that can now taste success after battling the ride-hailing companies for years.

The bill is intended to codify and extend a 2018 California Supreme Court ruling that put forth a new test for classifying workers. Under that test, workers are far more likely to be deemed employees if they perform a function central to a company’s business.

Legislators are expected to pass the bill before their session ends this week, presenting the strongest challenge yet to Uber and Lyft’s business model, which relies on a corps of drivers who can be enlisted and deployed essentially as freelancers.

The measure could affect millions of Californians beyond ride-hail drivers, including janitors, nail salon workers and cable-television installers. And it would give momentum to an emerging consensus on the center-left that workers are entitled to a basic level of economic security that many Americans now live without. Several candidates for the Democratic presidential nomination have endorsed the bill, including Bernie Sanders, Elizabeth Warren, Kamala Harris and Pete Buttigieg.

“It’s hugely important because California is the birthplace and the center of app-based work, and because California has traditionally been a bellwether for the country around a lot of different progressive policies,” said Rebecca Smith, an expert on worker misclassification at the National Employment Law Project, which is part of a coalition seeking to enact a similar law in New York.

Industry officials have estimated that 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, and Uber and Lyft have said in statements to prospective investors that being forced to make drivers employees could significantly affect their financial outlook. Since the prospect of a deal started to fade in late July, the stock prices of both Uber and Lyft have declined about 30 percent.

Analysts said the stock decline was due in part to concerns about A.B. 5, among other worries about the businesses. “Probably the No. 1 question we get from investors right now is about the risks here, qualitatively and quantitatively,” said Lloyd Walmsley, an equity research analyst at Deutsche Bank. “There’s obviously the risk that California is just the beginning, that other states could follow suit.”

Ride-hailing companies contend that A.B. 5 would force them to set rigid schedules, depriving drivers of flexibility, and raise fares to cover the cost of employment benefits. The companies say that about 90 percent of their drivers nationwide do not work a full-time schedule.

But Tyler Sandness, a Lyft driver who is an organizer for a group called Rideshare Drivers United in Los Angeles, said the bill was needed because “things have gone from bad to worse” for drivers. As independent contractors, drivers must cover the costs of vehicle ownership and payroll taxes, and lack much of the safety net afforded to employees, including workers’ compensation and paid sick leave.

That California has come to the brink of fundamentally threatening such marquee companies is the culmination of miscalculations by Uber and Lyft, a strong show of force from organized labor, and legislators’ resistance to the intervention of the new governor, Gavin Newsom.

The ride-hailing companies sought an amendment to the bill that would create a special category for their drivers, between contractor and employee. Mr. Newsom’s office would not comment for this article, but three people familiar with the discussions said the governor gave the companies clear advice: Get labor to bless such an arrangement, or face insurmountable opposition in Sacramento.

The companies turned their attention away from lobbying against the bill in the Legislature in favor of laying the groundwork for a deal. They conferred frequently with the governor’s staff, according to legislative aides. And they met more than half a dozen times during the first half of the year with representatives from a few large unions, including the Service Employees International Union and the Teamsters, two people familiar with the discussions said. Some labor leaders felt that a deal could leave drivers for ride-hailing services with many of the employment protections under A.B. 5 while allowing them to join a labor organization, potentially expanding the unions’ ranks by tens of thousands.

The negotiations appeared to make progress. Two weeks after the bill passed the state’s lower house in late May, Uber’s chief executive and Lyft’s co-founders wrote a commentary for The San Francisco Chronicle laying out the terms of a possible agreement along these lines. Uber and Lyft executives believed that a deal was near and some discussed how to sell it to the Legislature, according to two industry officials.

But opposition that had been simmering for months within the labor movement soon began boiling over, prompting the service employees’ union and the Teamsters to first delay and then pull out of a meeting planned for July.

Labor officials used a four-week recess beginning in mid-July to consolidate opposition to any agreement watering down A.B. 5 for gig workers. The state’s building trades council, which represents construction workers, worried that exempting Uber and Lyft would pave the way for exemptions in other industries, including their own. The council sent a letter to the governor stating its opposition and urged other unions to join it. Within a few weeks, several other unions followed suit.

The governor’s office persisted. Mr. Newsom’s chief of staff, Ann O’Leary, a former top adviser to Hillary Clinton, had lunch with John Zimmer, the president of Lyft, and Tony West, Uber’s chief legal officer, to keep the discussions alive, according to people associated with all the parties.

Aides to the governor also began calling legislators like Assemblywoman Lorena Gonzalez, the A.B. 5 sponsor, to gauge her openness to a deal. “He absolutely wanted a compromise,” Ms. Gonzalez said of the governor. “I was very clear at that moment that I wasn’t looking to sell out workers.”

After the Legislature returned in mid-August, there appeared to be one last chance for a breakthrough — not by carving Uber and Lyft out of the legislation, but by enacting a separate bill that would override portions of A.B. 5. A top state labor official circulated to colleagues an updated “rough concept draft” that could leave drivers short of full employee status, but give them a union that would bargain industrywide with the companies over wages and benefits and even allow them to strike.

The last week in August, a proposal from Uber with many of the same features was relayed to the State Senate’s bill writers. Lyft had put forth similar ideas.

To nudge forward unions that might be reluctant to endorse a deal they privately favored, Uber and Lyft announced that they would each kick in $30 million for a state ballot initiative next year to try to exempt their drivers from employment status if legislators didn’t do it first.

The governor appeared to pressure labor as well. The head of the state building trades labor council, Robbie Hunter, said he was left off a high-profile commission to study the future of work after receiving an invitation from the governor’s office. Mr. Hunter attributed the snub to his insistence on full employment status for gig workers.

“I was stunned,” Mr. Hunter said. “I do believe they thought I was going to change.”

He did not. On Labor Day, Mr. Newsom appeared to concede that the bill would pass without significant alterations for gig workers, and he endorsed A.B. 5 for the first time. But he urged the companies and labor officials to continue discussing ways “to build paths for workers in our state who want to join a union.”

An Uber spokesman, Matt Kallman, said on Monday: “We’ve engaged in good faith with the Legislature, the Newsom administration and labor leaders for nearly a year on this issue, and we believe California is missing a real opportunity to lead the nation.”

In some ways, the fight may have only begun, with Uber and Lyft likely to keep pushing for a separate measure scaling back some of A.B. 5’s impact in exchange for granting drivers the right to bargain with the companies. Anthony Foxx, Lyft’s chief policy officer, said, “We remain hopeful of reaching a solution that is good for drivers and builds a strong bridge with labor.” Such a bill could emerge from the Legislature next year.

“A.B. 5 is going to pass,” said State Senator Scott Wiener of San Francisco, Uber and Lyft’s hometown, who supports the bill. “But I’m confident this issue will be active in the Legislature for years to come.”

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