Graphic done by Mario Arasakumar
Context: The Birth of the “Gig” Economy
At the height of the Great Depression, jobless Americans – eager to support their families – flooded to their nearest cities desperate for work. When they arrived, the only available employment seemed to be with taxi companies who were inundated with job-seekers willing to work for pennies on the dollar. Sadly, those who were fortunate enough to land work as drivers were met with terrible working conditions; many fleet managers demanded their employees pay a daily fee to lease company cabs and others requested an unreasonably high percentage of fares. Come 1934, cab drivers’ frustration with their mistreatment escalated to one of the most notable strikes in American history - the New York City Taxi Riots. Then-Mayor of New York, Fiorello La Guardia, put an end to the bloodshed in his city by issuing a finite number of cab licences. By 1937, the number of NYC cab drivers fell from 30,000 to 16,900, equalizing the power imbalance between drivers and their employers by forcing fleet managers to compete for a limited pool of talent. Thanks to La Guardia’s bold action, improved working conditions for New York cab drivers were seen almost immediately.
Fast forward to the Great Recession of 2008, and a 21st Century twist on the 1930s job market was taking shape. Similar to the Great Depression, low-skilled workers found themselves desperate for work following the Financial Crisis. Many turned to short-term “gig” work and those with tech know-how were amongst the earliest to make a living through new online service platforms such as Uber, which was founded at the depth of the recession in 2009. It was during this era that the term “Gig Economy” or “Sharing Economy” became part of common lexicon. Today, a shocking 24% of American Millennials and 40% of Canadian Millennials are part of the gig economy - a labour market in which workers earn their livings through a series of short-term contracts. This contrasts the labour market of past decades, which was largely characterized by traditional full-time employment with a fixed schedule and a (relatively) fixed salary.
To incentivize workers to use their platforms, Uber and other gig economy start-ups marketed themselves to job-seekers as a new and flexible way to earn income. At first, this proposition seemed compelling to those who were unhappy with their employment situation; gig work allowed for flexible scheduling, minimal-to-no oversight by managers and the freedom to work from most American cities. While the benefits seemed plentiful initially, it quickly became apparent that full-time gig work was not an adequate substitute for full-time employment.
Same Job, Dismal Pay
The rapid rise of the gig economy can - at least in part - be attributed to the Private Contractor classification that gig employers have given to their workers. Under this legal classification, corporations are able to bypass labour laws including minimum wage, civic holiday rules, paid leave, reimbursements for work-related expenses and other benefits. It is well-known that the economic benefits of working in the gig economy are sub-par. Uber drivers – for instance - earn less-than minimum wage in most jurisdictions after accounting for gasoline and vehicle maintenance expenses. Additionally, drivers do not share the same legal protection as employees, leaving them exposed to lawsuits and defenceless against their employers’ actions.
The contractor classification has undoubtedly given gig employers an inherent cost advantage over traditional competitors. Ride-sharing drivers - who fill the role of cab drivers in the digital age – are compensated only a fraction of what they would have earned had they become cab drivers before the gig economy. It’s no surprise that over the last decade, city taxi companies started becoming a relic of the past as ride hailing giants - Uber and Lyft – chewed away at their market share by undercutting them on price.
A look at history reveals many similarities between the 1930s market for taxi drivers and the market for ride-sharing drivers in the early days of the gig economy. Both eras were beset by high levels of unemployment – particularly for low-skilled workers, young people, and recent graduates – and the balance of power was skewed in favour of employers. American consumers were tight on cash during both periods, which forced cab companies to compete on price, putting downwards pressure on taxi fares. After 2008, however, worker protection legislation was not improved to the same extent as it was during the Great Depression. This can be attributed to the rapid pace of technological advancement in the gig economy (which far outpaced lawmakers), combined with corporate lobbying and legal acrobatics, which allowed gig economy start-ups to side-step meaningful regulatory scrutiny, even a decade after the financial crisis pushed employees into gig work. While working conditions are far from ideal for those stuck in the gig economy, shareholders of sharing economy companies and users of their platforms have benefited tremendously from higher company valuations and competitive pricing, albeit to the detriment of the workers.
Assembly Bill 5: California Takes The “Gig” Out of “Gig” Economy”
While labour legislation has yet to fully catch up to the gig economy, California took a step in the right direction with its landmark bill in late 2019. On September 18th, 2019, California – the birthplace of the gig economy – signed Assembly Bill 5 (AB5) into law following countless protests by ride-sharing drivers across the United States who lobbied for better working conditions. AB5 prevents corporations from filling roles - traditionally occupied by full-time employees - with independent contractors and grants such workers the same legal rights as employees, including minimum wage, sick leave, unemployment insurance and other benefits. The bill also outlines a three-pronged test to indicate whether a worker is eligible for independent contractor status or not. A company’s workers must pass all three prongs to be classified as contractors. The test is as follows:
- The worker is free to perform services without the control or direction of the company.
- The worker is performing work tasks that are outside the usual course of the company’s business activities.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In short, AB5 states that workers who fill a role integral to the business for whom they work, and who do not operate their own contractor business outside the company, are considered employees of that company in California. At the very least, the likes of Uber, Grubhub and other sharing economy giants would fail prong 2, as the primary function of these businesses is to provide taxi and/or food delivery services, which drivers and delivery personnel directly facilitate. Evidently, AB5 is targeted at corporations who have benefited from the fruit of their “contractors” labour without providing them with a living wage.
While California is the first jurisdiction to crack-down on the labour practices of the gig economy, their move signals a broader turning point in U.S. labour policy. Democratic presidential candidates Bernie Sanders and Elizabeth Warren both support California’s decision and have indicated their interest in implementing similar legislation on a federal level should they win the 2020 U.S. presidential election. As labour legislation reform for contract workers grows in popularity among the left, it is likely that the gig economy will see drastic changes over the coming decade.
Given that California is the largest consumer market in the United States – with a population larger than Canada’s – Assembly Bill 5 has the potential to significantly disrupt the businesses of companies who benefit from the private contractor classification of their workers. The likes of Uber, Lyft and Postmates will likely all be affected by AB5 should their contractors be deemed employees by California. For much of 2019, the three gig economy giants were, and continue to be, tangled in legal battles against the State of California, arguing that AB5 is unconstitutional. The companies have also claimed that they are not players in the industries they have disrupted – as they identify as technology platforms, meaning that their workers are not part of their core software businesses. To many, these arguments seem preposterous at best, however, Uber has successfully articulated this defense to win similar court rulings in the past. As of late January 2020, the companies remain tied up in California court with no end in sight, and the rules set out by AB5 have been pushed to the sidelines until a resolution is found.
Given the backlash from gig economy companies, it is worth discussing the degree of impact AB5 could have on their corporate strategy. Currently, most gig economy companies remain in their growth phase, which entails burning cash and delaying profitability to fuel expansion. Uber – for instance – reported a net loss of US$8.3 Bn. over the last twelve months, without the effects of AB5. Barclays estimated that the associated costs of the bill would be so substantial that Uber would be at risk of bankruptcy. The same conclusion could be made for other gig economy titans, given their similar levels of indebtedness as Uber and their lack of foreseeable profitability. It follows that AB5-like policies risk drastically reshaping the landscape of the gig economy across all jurisdictions that follow in California’s footsteps.
A 21st Century Economy Deserves 21st Century Rights
As California’s landmark bill begins to take effect, it is worth asking: should a company that cannot afford living wages for their employees exist? With the public becoming increasingly concerned with corporate responsibility to broader stakeholders – beyond just equity holders – it would be fair to assume that a progressive-minded person would support improving rights for employees over the financial interests of Silicon Valley behemoths. While technology has certainly reshaped the workforce, it is important that the employees of the digital age maintain the same rights as previous generations. Following in the footsteps of Mayor La Guardia in the 1930s, the politicians of today should take firm action to prevent gig economy corporations from ballooning to multi-billion-dollar valuations at the expense of the labourers who made them. While AB5 is certainly a progressive step forward for gig workers, it will certainly not be the last. Lawmakers are growing increasingly cognizant of the reality behind today’s contract-dominated labour market, that is; the “gig economy” is but a guise used to mask unethical employment practices and side-step labour legislation.