Is the ‘Gig’ Up? How a California Court Ruling Could Change the Gig Economy

Californian judge Ethan Schulman has granted a preliminary injunction ordering Uber and Lyft to reclassify their drivers as ‘employees’. Previously, drivers were employed as independent contractors who were not entitled to sick pay, unemployment insurance or holiday pay. The ruling is expected to be appealed by the two companies.

Some have described this judgement as a major blow to the business models of Uber and Lyft. But what makes the current business model so profitable for platform companies yet bad for drivers? Let’s look at Uber.

Drivers are commissioned approximately a third of what passengers pay. After deducting vehicle expenses, Uber fees, tax as well as self-funded health and retirement benefits, the average hourly income is only USD$9.21. This means that American Uber drivers earn less than 90% of what workers earn. Also, their average hourly compensation is below the minimum wage in 13 of 20 major U.S. markets in which they operate.

All of this is legal because Uber drivers have been classified as self-employed, independent contractors. Therefore, companies like Uber and Lyft are not obligated to pay their drivers minimum wage or provide them with any employment benefits. Nor do drivers have a legal right to form labour unions or negotiate contracts.  Drivers who work full-time on these platforms are struggling to meet the demands of rising living wages, on top of paying for their own healthcare.

To be considered self-employed the drivers have to be “free from direction” and perform a service that is “outside the usual course of business of the employer”. This is clearly not the case. Drivers might get to work on their own time, but the number of clients they drive is completely determined by the platform’s algorithms. The drivers are also subject to strict rules about their vehicle’s condition and which routes to take.

Drivers for Uber and Lyft have been campaigning for a change to their employment status for years. In March 2018, 13,600 New York drivers accused Uber of intentional misclassification, which led to a USD$20 million settlement but no change in status. Later that year, a loose network of ride-hail drivers across the world staged a boycott of applications for 24 hours. Finally, In January 2019, New York City officials required ride-hailing companies to pay drivers $17.22 per hour (after expenses).

However, the biggest victory came from California at a time when workers’ protections are most vital. Giving drivers the right to sick pay will ensure that they are not tempted to work despite showing COVID-19 symptoms, preventing the spread of the virus to their colleagues and clients. Furthermore, the pandemic has negatively impacted the number of ride bookings which could lead to mass redundancies as revenues plunge. It is important that drivers have access to unemployment benefits to survive the tough times ahead.

Still, Uber and Lyft insist that a majority of their drivers would prefer to be considered as independent contractors. Many speculate that this is because a change in status would mean huge reductions in their profit margins as they would be forced to pay for employment packages and minimum wage. The evidence suggests that these companies have become so successful by skirting US labour laws.

The California ruling could become a catalyst for pressure in multiple other jurisdictions. In fact, the UK Supreme Court is currently considering a similar case. Could we see a shift in the gig economy?

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