Note that this article, “6 Questions on How AB5 Will Affect Couriers for Grubhub, Postmates, Doordash, Uber Eats etc?” is the fourth of a six part series we will be posting about California Assembly Bill 5 (AB5) that just passed the California State Senate. We published this week’s episode of the Deliver on Your Business podcast early due to the pending passage of AB5. Normally we run a companion post that matches the podcast episode. There’s just so much to talk about with AB5 that it couldn’t be fit into a full episode, so I decided that a series related to it would make more sense.
AB5 was passed by the California State Senate late last night (September 10, 2019). It isn’t law yet, but it’s expected to be just a formality now. The bill will go back to the State Assembly for approval on ammendments and then will need to be signed by the Governor. Governor Newsom to become law.
What does this mean for couriers delivering for Gig companies like Grubhub, Postmates, Doordash and Uber Eats in California? How will it change the landscape of the gig economy? What will be different about being an employee (IF that happens)? Below are six questions about how things will change for couriers in the gig economy working in California
1. When Will Couriers Become Employees?
This is going to take some time, folks. Understand that you will not wake up as an employee the day after the law is signed.
The legislation is scheduled to go into affect January 1, 2020. Focus on the word scheduled. Understand that gig companies are pouring a lot of money into fighting this thing and they aren’t going to give up with the passage of this law.
I would expect a lot of court challenges. One thing to keep in mind is that the state supreme court has already ruled. You could say they actually created the law, which is a bit backwards if you asked me. But I wouldn’t expect any traction in the state courts.
I do think there is a possibility that the courts could issue a delay. Uber, Lyft and Doordash have pledged $30 million apiece to back a back a ballot initiattive that would bring this before voters. This wouldn’t hit the ballots until 2020, but if there is enough traction on the initiative I do see the possibility that the courts could delay this law until the initiative has been decided.
Bottom line, it’s going to be a few months at least. It could be years.
2. How Will This Impact the Gig Companies?
If and when companies have to start hiring employees instead of contractors in California, they will have to make a decision. They have long campaigned that they can’t afford the additional costs. Most of these companies have yet to turn a profit, so this could be a big hit on their bottom line if they have to ramp up HR and management for drivers, pay taxes and insurance and all the other things that have to do with hiring employees.
If they determine having employees is not sustainable, they could choose to close up shop in California. Some of these companies are pouring a lot of effort into fighting this thing. If they go all in on the fight and lose, would they have to close up in California simply because they weren’t prepared to hire drivers?
What about Postmates?. 40% of their business is in California. What if they cannot profitably transition to an employee model? Losing 40% of their business could kill them as a company. My hunch is that this will lead to them selling out to another company (Amazon maybe?).
You know who fascinates me in this whole process? Grubhub. They have been conspicuously absent in this whole fight. I have to wonder if that’s a strategic thing. I have to wonder if they see this as something that might weed out some of the competition. They are the one profitable company of the four major gig delivery apps, and maybe they realize that they could survive a transition to an employee model where some or all of the others couldn’t.
I believe there is a real potential that companies could actually benefit from this change more than we think. That might be worthy of another article some day.
3. Would you even be hired?
I’m not sure the people who wrote this law thought this question through. I think there is an assumption that everyone would just get hired. The company Deliv decided to transition from a contractor to employee based work force. They did their hiring from scratch and did not just transition everyone over.
Do not be surprised if that’s what happens with any or all of these companies. I would expect them to start hiring from scratch. I would be extremely surprised if they ended up hiring everyone that is contracting. Their requirements and criteria could change now due to it being an employee. They may decide they don’t like your performance and they can choose whatever metric they want to evaluate if you would be a good employee.
3. How would pay be different as an employee doing delivery in California?
Here are a couple of things you have to understand about California employment law. First, they do not have a ‘tipped minimum wage.’ Tipped employees have to be paid the minimum wage and tips are ON TOP OF that wage. The other is that employers are required to reimburse employee expenses. That includes cell phone (if not provided by the employer) and FULL vehicle reimbursement.
I foud a good article about mileage reimbursement in California here. I would expect that gig companies will set a reimbursement rate below the IRS 58 cents a mile. It’s also reasonble to expect them to settle in at around 40 cents a mile. Here’s the thing in California, that if you can demonstrate that your actual cost is higher than what they reimburse, they have to pay the actual cost. If they go too low, they can get challenged a lot more often and that becomes a time suck for them.
So let’s look at a contractor right now who averages $20 per hour, half their pay is in tips, and they average 15 miles per hour in business miles. Under California’s minimum wage, they would get $12 for the minimum wage, still get their $10 in tips, and then $6 mileage reimbursement (assuming 40 cents a mile). The total now is $28 per hour. The company’s responsibility went from the $10 they previously paid in delivery fees to $12 wage and $6 mileage reimbursement.
4. Would employees lose flexibility?
There would be a loss of flexibility. That loss doesn’t need to be nearly at the level that these gig companies would have you believe.
On the one side, there is no law that says that any employer has to be controlling of your schedule. In fact, flexible work schedules are becoming more and more common. Deliv is one delivery company that already transitioned to employees in California, and they are continuing to allow flexible scheduling.
On the other side, because of minimum wage and overtime laws, companies need to be able to place limits. I also believe that companies will be limiting full time employment. You won’t be able to schedule as many hours as you want any longer. There will be limits. I do not expect there to be as much flexibility on making changes on the fly or to not show up for a scheduled shift as you have as a contractor.
Because hiring can be so competitive, I think companies will need to continue offering flexibility in scheduling. If I were to guess, I expect most of to use something similar to Grubhub’s block scheduling system where drivers get priority access to schedule based on their performance.
Obviously, it’s up to the company to offer flexibility, but in an industry that relies on a lot of part time workers I think the market is going them to remain fairly flexible in scheduling.
5. What other pros are there to being an employee?
There are a number of tax advantages to being an employee. In particular, you no longer would have to pay the full self employment tax. Your 15.3 percent self employment tax is double the 7.65% Fica/Medicare that you pay as an employee. Having your taxes withheld for you is going to be a huge benefit to a lot of couriers.
Beyond that, you have the protections that go with being an employee. A company now has to pay you minimum wage. You have more resources at your disposal if a company fails to pay you the proper wages than you do as a contractor. Overtime laws would apply.
I think some of the least known protections are the most important ones. If you are hurt on the job, your employer is responsible for the cost of care. You can also be entitled to lost wages in the event that keeps you from working. I don’t think most contractors understand how vulnerable they are in this area. Unemployment insurance is also huge. You are covered by Family and Medical Leave Act. You also have more protection against wrongful termination as an employee.
6. What are the disadvantages of being an employee?
I think this depends on who you ask.
For me, the disadvantages are enough to be a deal breaker, but that has to do with why I chose this line of work to begin with.
You are no longer your own boss. You can no longer set your own direction, you can no longer determine how you work. Being an employee means having to answer to supervision. The employer has the right to direct your work and even direct your appearance as an employee. These are more important factors for some than others.
I think that you also lose some of the upper potential in earnings. I am able to earn more because I can direct myself to be more efficient than if I were following the direction of any one company. Being independent means that I can switch to other opportunities on the fly if I’m not earning what I expect. You will lose that ability to work mulitple apps at one time.
If you do this full time, be prepared for full time to go away. Companies have to offer more in benefits for full time employees, and they can choose to limit their opportunities to part time. I don’t know how much they could legally restrict you from working for another delivery app when off hours, I’m not familiar with non-compete laws in California.
Do you lose tax advantages being an employee?
I’m not making this question number 7, because it really is part of that question of what you lose when you go from contractor to employee.
There are some tax advantages that you lose as an employee. In the latest tax code there were some benefits given to independent contractors. The biggest one is a 20% pass through deduction you can take on your income tax. There are some others but essentially they are there to offset some disadvantages.
I do hear a lot of people talking about how you will lose out on the tax write off for mileage if you are now being reimbursed for miles. I don’t know that that’s as big a factor as a lot of people think. Here’s the most important thing when it comes to taxes. How much or how little you pay is meaningless. The important thing is how much you have left over AFTER taxes. Staying in a lower paying situation simply because you pay less taxes can be a matter of cutting off your nose to spite your face. It CAN be a disadvantage depending on your situation, but you have to look at the total picture based on your own situation.
SO THEN… Is it Better or Is it Worse to Be an Employee?
There are things that are better. There are things that are worse. Ultimately it comes down to what is most important to you.
If you are in California, you’ll have some time before changes actually happen. This would be unsettling because you don’t even know if you can rely on being hired when the transition does happen. Keep an eye on things right now is the best advice I can give you.
And don’t move to Denver. We’re getting crowded already. Just sayin.