Note that this article, “But You Don't Live in California. What Will AB5 Mean For You?” is the fifth 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 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 is about to become law. Everyone's talking about it. Heck, some blogger is spilling out a 6 part series on it.
But this is only California legislation, right?
That's a good question. Yes, it only applies to California couriers. I have to say, I'm glad I don't live in California. But what is the ripple effect going to be? Rest assured, there WILL be a ripple effect.
There will be an impact nationwide, but it will take time
The law is schedule to go into effect January 1, 2020. That doesn't necessarily mean that it WILL happen then. A lot of gig companies with a lot of money at their disposal are based in California. You can expect court battles and injunctions and anything they can throw at the system to stop or delay this law.
Uber, Lyft and Doordash have all pledged $30 million apiece towards a ballot initiative that would create a third designation somewhere between employee and contractor. Depending on if they get much traction on that initiative before the end of the year, I could see the potential of them getting an order that would delay that until the matter could be decided in the polls.
The other thing that's going to happen is that a lot of states are going to take a watch and see stance. There are a number of states already considering similar measures, but now California gets to be the guinea pig. What does this do to the economy there? Will it accomplish what they hope it will? What are the unintended consequences. I don't expect states to act just because California acted, but instead they will watch what happens with California and decide accordingly.
Will this prompt a more comprehensive definition of independent contractor?
Here's one of the biggest problems: Everyone knows that calling someone a contractor when they should be an employee is wrong. But what exactly determines when someone should be an employee? There are so many interpretations out there. Even within the federal government, the IRS sees things differently than the National Labor Relations Board.Each state has a different test.
I will say, I like the clarity of the ABC test that California has adopted. It's very straight forward – you have to meet all three conditions. So many of the other interpretations are subjective. For example, in the NLRB's decision that Uber drivers are contractors, they found that Uber had crossed the line in a number of ways, but that the lack of control over the work of the driver outweighed those factors. Who determines what weight to give each factor?
I expect the transition in California to be tumultuous and maybe painful. Not that I would wish painful on anyone, but there is a degree where that might be a good thing. I say this because I hope it kicks the conversations into gear and helps us get a better handle nationwide on exactly what an independent contractor relationship should look like.
How will this impact the Gig companies?
These delivery companies will have to choose between adapting or getting out of the market.
There's a very real possibility that a lot of this gig work is unsustainable once everything is taken into account. If the handwriting is on the wall that this could move to a nationwide shift to an employee model, we have to be ready for the possibility that some or all of these companies could simply cease to do business.
Should that happen? I don't want to see people lose the earnings potential that is lost if that happens, but at the same time, I feel like if a business has to rely on a model that is built around treating workers unethically, and it cannot survive a change of the model, that business SHOULDN'T survive. It's as simple as that.
A Tale of Two Gig Companies
If I were a gambling man, I might be tempted to put money on Postmates not surviving this change. In fact, a big change for Postmates could be the first big national (or even California-wide) impact of this bill. There are two factors in play with Postmates. First, 40% of their business is in California. If they're unable to profitably make a transition, I think that would be a death blow for them.
The other factor with Postmates is that they have been known to court mergers with other gig companies. This very well could be the catalyst that makes that happen. I could see Doordash acquiring them. There have been rumors in the past that Amazon is thinking about buying Grubhub but I wonder if Postmates could be an attractive option instead. They could be a bargain right now.
Have you ever played a game of Risk? It's a board game and the object is to take over the world. Sometimes the one to watch out for is not the player that's making the most moves, but the one who sits back while everyone else beats up on one another. I kind of wonder if that's what Grubhub is doing right now. They have been conspicuously quiet when all the other gig companies have put up a battle over passage of this legislation. Keep an eye on them, I have to wonder if they see the adoption of this law as a big competitive advantage for them.
Will this mean that the contractor relationship will go away nationwide eventually?
I have no idea.
Look, some states are never going to adopt similar legislation. Unless there is a national adoption of a definition of what an employee is, nothing's going to happen in states like Texas. So it may not be forced nationwide.
I do think that it might lead to a nationwide change, but that it will be voluntary.
It's going to be very inefficient and taxing to have different employment models in different parts of the country. I'm sure that these gig companies will try it for awhile, but at some point I have to think they'll have to make a decision. It's either going to be pull out of the employment states completely, or it will be choose to adopt the employment model nationwide.
There could be a voluntary change
Honestly, I think the possibility is very high that they could discover that the employment model is better for their business, and THAT will be what prompts the change.
These delivery companies are all struggling with customer satisfaction issues due to orders not being fulfilled and horrible customer service. Their problem is, they cannot control much. They cannot control whether someone accepts an order to deliver, they cannot control the behavior of a driver, they cannot prevent a driver from picking up a delivery from another platform at the same time. Gig companies cannot control whether a driver looks professional or sloppy. In the end, this creates customer satisfaction nightmares for all of them.
The other factor that makes me think this could happen is related to efficiency. There is an insane amount of wasted time in this industry. Between long drives to a customer and long waits at the restaurant, it's incredibly inefficient. You can guarantee that if the driver is an employee getting minimum wage, there is no way they are waiting at a restaurant more than a couple minutes. Paying reasonable mileage compensation and wages during drive time is going to force companies to dramatically improve efficiency.
If these companies can now control and direct the activities of employees, something they cannot do with contractors (not legally, anyway) they can much better orchestrate how these deliveries will get fulfilled. I think the efficiency gains could offset the extra costs. At some point, a light is going to go off in someone's head and they'll figure out it just makes more sense to use employees nationwide.
Change, it is a comin.' It's just going to take time.
My guess is that AB5 will be one of the triggers for a chain of events that will ultimately lead to one of two wholesale changes. Either these companies will find the business model is unsustainable and the delivery gig will just go away, or these companies will transition fully to an employee based model.
Either way, it's going to be a long time before it happens. Maybe years. Most of us will have moved on by then.
And there's always a possibility that you could be reading this in a couple years and laughing out loud, thinking ‘boy, that EntreCourier dude really whiffed on this one.'
Wouldn't be the first time.
