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No California Love for the Gig Economy

Wietse Nijenhuis

By Wietse Nijenhuis

Head - Equity Strategy

September 16, 2019Posted InEquities and Investment Strategy

What happened? On September 11th, California lawmakers approved Assembly Bill 5 (AB 5), a piece of legislation which requires companies, including ride-hailing giants Uber and Lyft to reclassify certain contract workers as employees. If signed into law, AB 5 will go into effect on January 1, 2020 and could deal a heavy blow to companies which rely on contractors, adding to existing concerns over the path to profitability for many of these companies. 

Who is affected? Companies such as Uber, Lyft and Doordash are among the high profile companies affected. The legislation also covers many other groups such as truck drivers and newspaper carriers. It is estimated the legislation could change the employment status of over one million Californians. 

Pro legislation: Gig economy workers arguing that all workers should be entitled to a basic level of economic security such a paid vacation, sick days and health insurance benefits. They have support from lawmakers, including democratic Presidential hopefuls Bernie Sanders, Elizabeth Warren and Kamala Harris. 

Against legislation: Silicon Valley. Ride hailing and food delivery companies don't consider themselves to be in the transportation or delivery business. Rather, they view themselves as online market places connecting workers with opportunities. 

Impact on gig economy companies: Employees are estimated to cost 30% more than contractors. The additional expense from higher wages and contributions to healthcare plans, 401ks, Medicare, FICA and other payroll items would make the path to profitability for high profile ride hailing and food delivery companies incrementally less clear. 

Impact on gig economy workers: The legislation will likely curtail the flexibility contractors enjoy, while fares will rise to cover additional costs. Unintended consequences might be a limit on driver hours in an effect to avoid over-time payments or the requirement to cover health care costs. Full-time employees would also not be able to work for multiple companies, i.e. a driver won't be able to drive for both Uber and Lyft. 

Why now? Legislation always trails innovation as regulators struggle to keep up with the pace of technological advances. The ramping up of the US presidential election cycle is likely playing a role. Lawmakers need to tread a fine line; too much regulation too early hinders innovation, while reacting too slowly risks a regulation over-shoot. 

Snowball effect? The greatest risk for gig economy companies is the potential for AB 5 legislation to spread, as was the case with the California Consumer Privacy Act (CCPA). The law to enhance the privacy rights of Californian consumers was passed in 2018, and since then a further 19 states have introduced similar laws or amended existing laws. With New York Governor Andrew Cuomo sigaling his support for AB 5 legislation, New York looks the likeliest to follow California's lead in some form or another. 

It ain't over till it's over: Although companies adversely affected by AB 5 are facing an uphill battle, the fight is far from over. A trinity of Uber, Lyft and Doordash have pledged a total of $90m to bring the issue to a ballot. 

Conclusion: It is significant that this legislation originates in California; the birthplace of app-based work and a harbinger of broader progressive views. Public perception is shifting - gone are the days when everything with a Silicon Valley stamp was universally applauded for its potential to change the world. Instead, the spotlight is being shone on the unfair treatment of workers and cultural problems inside organizations. 

Tech sector impact: The combination of turning public opinion, growing privacy concerns and rising political risk from the electoral cycle will likely limit the upside for the parts of the tech sector most dependent on contractors, advertising revenues and the user of consumer data. Less impacted are likely to be tech giants with more diversified revenue streams and established, profitable business models.

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