What’s Going on in California? Will AB5 Force Grubhub Doordash Uber Eats to Shut Down?

Uber and Lyft may be shutting down this week in California. Will Doordash, Grubhub and Postmates follow suit? How does this impact Uber Eats food delivery?

And what will this mean to those of us not in California?

We'll talk about what all is going on in California, talk a little about the ballot initiative for Prop 22 and then get into what's happening nationwide.

AB5 is hitting the fan in California

Back in Episode 52 on the podcast, we talked about what would happen in California now that the new year was happening. AB5 would go into effect – what would change on January 1?

I said then that nothing would happen.

Nothing changes until it changes

From “What happens to California delivery contractors on January 1 with AB5?“

No one is becoming an employee automatically. In fact it's going to take some time.

Things will change if and when any of the companies, Grubhub, Postmates, Doordash, Uber Eats or any of the others, decide to hire employees instead of contractors, or until they are forced by the state and by the courts… if they are forced, it will take time, because it will have to go through the courts.

From the same article/Episode 52.

Here it is, August, and only now is the state starting to enforce things with gig companies.

It started with Uber and Lyft

They set their eyes originally on Uber and Lyft. In fact, the state won a preliminary injunction against Uber and Lyft requiring them to classify their drivers as employees.

As I mentioned back at the end of the year, drivers won't just magically become employees. If either of these companies gives in and decides to go to an employee model, two things will happen:

All driver contracts will be canceled. Everyone gets deactivated.

These companies will then start hiring employees.

That's because having employees and having contractors is two totally separate things. The hiring and onboarding are different. Gearing up an HR staff is a different animal altogether when you have employees than farming out support to an overseas call center for your contractors.

Both companies sought a delay in the order, saying they needed more time to gear up. That's a legitimate argument, to be fair. It takes time to get an infrastructure into place.

But to also be fair, they've had time. This law was passed a year ago. It went into effect January 1. It's August as I write this. That's plenty of time. The bottom line is, neither company intends to go to an employee model.

So we're at a standoff.

Doordash and Instacart may be next.

Instacart has been sued by the San Diego attorney, and Doordash by San Francisco's attorney general. Both are being sued under AB5, calling for a ruling that contractors have been misclassified.

It's more or less the same thing. An injunction can be filed, and they can be forced to either switch to employees, almost immediately, or cease doing business in California.

Why them and not Grubhub or Postmates or others?

It comes down to something I said back in Episode 52:

There's a common misunderstanding. AB5 did not and will not change anyone's status. All it does is provide a guideline around whether a company can call you a contractor.

In other words, nothing changed in January as far as anyone's actual status. Companies were not prohibited from using contractors. The law only defined the circumstances in which contractors could be used.

Basically what's happened is that these companies all are taking the stance that they can legally use contractors. At that point, it's up to the courts to decide.

And the courts are starting to decide.

The reason it started with Uber and Lyft is, those are the ones the state went after first. The reason Doordash and Instacart are facing challenges is, those are the ones that government authorities have gone after next.

What about Uber Eats and Grubhub?

Even though Uber Eats is owned by Uber, the injunction right now against Uber only relates to rideshare drivers. Marketwatch reports that the models between delivery and rideshare are just different enough that including Uber Eats in the court filing would have complicated things.

As it stands, right now, Uber Eats is safe.

For now.

The same can be said for Grubhub. The bottom line is that nothing is happening with them yet because they haven't been sued. Yet.

What happens if and when any rulings are made against delivery companies?

Basically, they have the same choice that Uber and Lyft had: Hire employees or shut down in the state.

As it stands, it looks like Uber and Lyft will pull out of California temporarily by the end of this week.

Unless any of these companies already plans to make a fundamental shift in how they do things, I would expect them to follow suit and shut down.

Wouldn't that give companies who weren't sued yet an unfair advantage?

My guess is, if there's much traction in the suits against Doordash and Instacart, officials will move pretty quickly against the others.

The thing is, say Doordash shuts down but Grubhub hasn't been sued yet and are able to keep operating? All of a sudden their largest competitor has been taken out of the market. While that's awesome for them and anyone else still standing, how is that right to single out one player over the others if they are all using similar models?

The larger question might be, what does that do to California, especially during the pandemic, to suddenly have delivery options taken away?

Right now this is a big game of chicken. Unfortunately too often it's the bystanders who are hurt the most.

What are the alternatives if California couriers don't want to be employees?

Right now, it's looking like stuff's about to get real. The state is getting serious about enforcing AB5 with larger companies, and who's going to be left in the dust?

There's an interesting irony that has to be brought up:

You know who is responsible for enforcing AB5 for the most part? The California Employment Development Department.

When the pandemic hit and unemployment applications went off the chart, when the state was overwhelmed and couldn't keep up with applications, you know what they did? They hired independent contractors.

They have independent contractors doing the work of the state, in clear violation of the A test of the ABC test.

And who's the department that made this arrangment?

The California Employment Development Department. The same guys charged with enforcing AB5 are violating the same law.

I'm glad I'm not in California.

But, for others in California, what are the alternatives? If you don't want to be an employee with whatever companies DO hire employees, if they do, what can you do?

Prop 22 is on the ballot for November.

Here's what I think has been going on with these gig companies. My gut is, this has been all planned out and orchestrated. I don't think Uber and Lyft are surprised at all by what's come up. They knew this day was coming and they've been planning for it.

In fact, they may have wanted it all to happen just as it has.

They drug their feet just long enough to get to this point. Okay, the state sues them, gets an injunction. That basically means they can't drag it out in court any longer.

So, Uber and Lyft shut down. In late August. With the ballot issue coming up in November.

People can't do rideshare. Possibly they won't be able to order delivery if the other dominoes fall. Contractors are out of work.

What's that going to do for Prop 22's chances to pass?

What is Prop 22 and is it the answer?

Proposition 22 is a ballot initiative that gig companies have invested millions in, all in response to AB5. The idea is to create a gig worker classification.

Prop 22 pushes for a minimum pay threshold for gig workers. Workers would be guaranteed 120% of minimum wage plus tips plus 30 cents a mile compensation. There's an element where funds would be provided for benefits and such.

It's marketed as providing protections for independent contractors similar to what employees have while still maintaining independence for independent contractors.

We don't have the time to get into all the nuances. There are pros and cons. There are things that it doesn't do where employees are protected. But it does provide some definite advantages over the pay scale that is currently in place.

If the choice were purely Prop 22 OR AB5, I'd see it as the lesser of two evils. Because I do have one big issue with Prop 22.

And I have an issue with the gig companies. If they're so dedicated to providing extra, why don't they just do it? Why don't they do all this in other states that don't have laws against it? And I think this is short sited on their parts because what they're doing is encouraging adoption of AB5 type legislation nationwide – because the only way to get those extra benefits is to pass laws outlawing the use of independent contractors. Are they shooting themselves int he foot?

My big issue though has to do with control. Prop 22 introduces a time-based pay element. That time-based pay allows them to exert more control over contractors. Specifically, it allows them to prohibit working other apps while engaged in a delivery.

I'm not in favor of giving gig companies control like that.

The other option: Repeal AB5

AB5 has been a nightmare for independent workers and entrepreneurs in California.

Freelancers of all stripes and types have been impacted by this law. It doesn't just hurt gig workers. The bottom line is, it's stopped people from being used as contractors but hasn't resulted in hiring employees in their place.

To me, it just makes more sense to get rid of a bad law than to replace it with another flawed piece of legislation.

Why aren't gig companies putting more effort into repealing AB5? This is just my hunch, but I've got a feeling they'd rather have Prop 22 than be in the status quo. And that goes back to legally having more control over the workers.

That's my theory.

An interesting third option is appearing: A Franchise model

The New York Times reports that Uber and Lyft are looking into a franchise model that would allow them to keep operating in California. It would allow them to farm out the rides to businesses that sign on as franchises.

Right now it looks like they'd farm it out to larger fleet operations. However, I could see gig companies developing a franchise model where individuals could form their own business entity.

I don't have enough details on how they'd want to make it work and don't know enough about the rules around franchises. It's an interesting concept. I don't see it being the ideal for them though, because I'm not sure they could get enough people to meet their demand using this model.

I say this because I think the reason these companies aren't more up front about what being an independent contractor entails is that if people really knew what htey were signing up for, they couldn't get enough people to sign on.

And the more people who think like employees, the easier it is to control them.

Is Grubhub being the sly, silent type, lurking in the shadows?

If you ever played the game Risk, you'll understand what I say when I think maybe Grubhub is using the Australia strategy.

In Risk, the object is to build up an army that can take over the world. You try to control continents, stop others from controlling theirs, all that. I've won a lot of games of Risk by quietly building up my armies in Australia, isolated from a lot of the other areas on the map. You sit back, quietly build, let everyone else beat each other up, and then swoop in.

I'm seriously wondering if Grubhub is doing something like this.

Grubhub never got involved in all the Prop 22 campaigning. They've been kinda quiet about all this.

I've speculated at times that I wonder if Grubhub hasn't been pulling some of the stuff they pull because they want to force an employee model. That maybe they see themselves as the one who could actually SURVIVE an employee model.

I suggested that a company could swoop in with an employee model and disrupt the industry.

In Episode 51 of the podcast and the associated post, I offered what I called my Christmas gift to the companies: How to dominate in delivery.

And how do you do that?

Be awesome at delivery.

If a company could focus on logistics, efficient delivery, fantastic customer service both to the restaurants and the end users, they could differentiate themselves enough to justify being able to set their own price.

In fact, if they're good enough at the efficiency, they could probably do more for the same price.

Even if that meant paying for employees.

Because paying for employees is probably necessary if they want to master the logistics. A company would have to be able to control the process better and you can only do that with employees.

Is their upcoming merger with Justeat Takeaway a hint?

There was an interesting article put out by the BBC about Just Eat Takeaway, the company that is buying Grubhub.

They stated that they intend to move away from the contractor model in Europe.

Understand: the merger with Grubhub hasn't happened yet. But you have to think this may have been part of the discussions.

Could Grubhub be planning the same thing?

If they were, this is the perfect opportunity. If the competition bails out in California, is Grubhub poised to switch to an employee model and swoop in?

Keep an eye on Grubhub.

What does this mean to those of us not in California?

My first piece of advice is, pay attention to what's happening in your state.

There was a Court of Appeals ruling in New York in March of this year that has flown under the radar. Ultimately they ruled that a Postmates courier was an employee. It was an unemployment ruling, but being the highest court, with no room for appeal, it sets a precedent. New York could be the next domino to fall.

Other states are looking at similar legislation. What's happening in yours?

Here's another thing you have to pay attention to. It's nationwide legislation called ProAct. It's a larger piece of legislation related to unions, but it includes a provision that would adopt California's ABC test nationwide.

ProAct has passed the House of Representatives. Joe Biden announced that if it passes the Senate, he would sign it into law if he's President.

This is not to say who to vote for. I'm not a one issue type of person. I've got real problems with both candidates. Personally, with both candidates there's things they stand for that I'm in favor and there's things that make me hold my nose, you know?

My main thing here is, know what could be out there.

When AB5 passed, I wrote about how AB5 could impact things nationwide, if you want to read more.

AB5 is also one of the things that had me thinking that the whole gig economy delivery thing could become a thing of the past. I still believe that's a distinct possibility.

Why am I saying all this?

Because you want to be prepared for if it happens.

Uber and Lyft drivers in California may have only days left. Delivery couriers might have weeks.

But here's the thing: the handwriting's been on the wall. No one should be surprised that anything is happening.

For those of us nationwide, the handwriting might look more like hieroglyphics. It's maybe there but not as easy to read and decipher. But it's there.

Things may change. Do you have an exit plan? That's going to be one of the things we'll bring up in the 31 day courier MBA email course. Are you ready? What will you do next? There's stuff that says change could happen. It might be quick, it might be months away.

Keep watching. Keep paying attention. And be ready to give yourself an out.