Big Changes to Come as Uber Tries to Safeguard Its Business against California’s Gig-Economy Law

Uber is facing an existential threat to its business model—California’s newly enacted Assembly Bill 5 (AB5). Uber and other app-based technology companies that built their business models on the backs of independent contractors now need to quickly reinvent themselves.

Lawmakers in California and other states are accusing Uber and other tech companies of trying to exempt themselves from laws by classifying their workers as contractors under false pretenses.

Regulators contend that they should be considered employees and afforded all requisite rights and privileges. In response to the new law, Uber is quickly making changes. These test-case alterations are an attempt to circumvent the current law.

This piece of new legislature could force Uber and other gig-economy and app-based businesses to reclassify their independent contractors and make them employees—unless they enact changes that conform to the law. Uber has been accused of asserting that its drivers are independent, whereas the state of California claims they are employees. The difference is not inconsequential. The amount of money at stake is massive.

Uber is trying to show lawmakers and regulators that their drivers will now have greater independence, leeway and freedoms. The company enacted new policies that will allow drivers in California to have more information about riders, so they can decide if they want to accept a customer or not. They will be made aware of the travel time, distance, destination and fare, so that the driver can make an informed independent business decision. California-based drivers may also feel free to decline a ride request without suffering any corporate-induced penalties. Uber is test marketing these new features before the rideshare company implements them across the country.

Uber is also working on a new feature that will permit California drivers to establish their own prices instead of having to use Uber’s fare mandates. Drivers may now increase fares as they see fit, as long as they adhere to certain parameters. This feature will enable drivers to raise or lower fares, as they see what works best for them.

It seems that Uber is rolling out these new changes to show lawmakers and regulators that its drivers are truly independent. There is a standard litmus test used by the government to determine whether a person is an independent contractor or employee. It’s known simply as the “ABC” test. A worker could only be an independent contractor if each of these three factors are met:

The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
The worker performs work that is outside the usual course of the hiring entity’s business.
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Uber and other gig-economy companies, such as Lyft, DoorDash and Instacart, must satisfy the ABC test to legally classify a worker as an independent contractor.

There is an enormous financial incentive for corporations to continue classifying drivers as contractors. With this model the company doesn’t have to pay payroll taxes, FICA (Social Security and Medicare), disability, federal and state-level unemployment, health insurance benefits or comply with minimum wage laws and vacation days. Uber saves a fortune, while the state of California misses out on a significant amount of tax revenue.

To put this into perspective, New Jersey sued Uber to reclaim about $600 million. The state government claimed that by avoiding classifying its drivers as employees, Uber didn’t have to pay Social Security and payroll taxes, unemployment insurance and state employment taxes, provide workers’ compensation insurance or comply with minimum wage laws.

Due to the large amount of money at stake, the potential for Uber’s implosion, public opinion, the fates of millions of workers, coupled with armies of lawyers on the sides of both Uber and the state of California, this battle may wage on for a long time.

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