New California Ballot Initiative Is Just More Favoritism

Last month, Uber, Lyft, and DoorDash launched a $90 million advertising campaign in support of a California ballot initiative to pass the Protect App-Based Drivers and Services Act (PADSA). The act would grant some gig economy workers an exclusion to the problematic Assembly Bill 5 (AB 5) which recently passed.

Supporters of the campaign are correct that AB 5 “jeopardizes the freedom of hundreds of thousands of Californians” and “threatens the availability” of app-based services, but their ballot initiative is not a good solution. Both the law and ballot initiative are fundamentally flawed in much the same way: Each only increases the problem of government favoritism while hurting workers at the same time.

What Is AB 5?

AB 5 makes it difficult for employers to classify their workers as independent contractors and was intentionally designed to counter the practices of large gig economy companies like Uber and PostMates, whose business model is built around using platform apps to connect individual service providers with customers. The law will increase the cost of employment for up to 2 million workers and force many companies to shift to a less flexible business model.

AB 5 will likely result in fewer jobs for freelance workers, higher prices for consumers, and less competition and innovation within the gig economy.

The change substantially increases the cost to employ these workers because state and federal regulations require that employees receive benefits like unemployment and disability insurance, health insurance, paid leave, and overtime pay. The cost of providing such benefits for private industry workers accounts for 25 to 35 percent of total employee compensation.

But worker advocates shouldn’t necessarily expect that converting independent contractors to employees will raise their net compensation. A significant body of economic research shows that workers pay most of the cost of benefits they receive through reduced earnings. As a result, the recent report by Barclays—which estimates that the reclassification would cost Uber and Lyft an additional $3,625 per worker in increased annual payroll taxes alone (not including the cost of other employee benefits)—should probably have noted that much of the cost would actually be borne by workers through pay decreases, delayed pay increases, or similar cost-cutting measures.

As we have previously written, AB 5 will likely result in fewer jobs for freelance workers, higher prices for consumers, and less competition and innovation within the gig economy.

Exceptions to the Rule

However, AB 5 also adds insult to labor market injury by being riddled with exceptions. From dentists to commercial fishermen, California’s legislature exempted professions with sufficient political influence to muster a loud enough complaint. The law creates an unequal playing field where some companies and workers (like freelance writers and independent truckers) have to comply while others can continue with business as usual. The California Trucking Association has even filed a lawsuit challenging the constitutional validity of AB 5.

AB 5 violates the idea that every person and company should be treated equally by the law.

This kind of government favoritism is intuitively unjust, as it explicitly favors some groups of individuals over others. AB 5 violates the “generality principle” that underlies the rule of law—the idea that every person and company should be treated equally by the law.

The Answer Isn’t More Exceptions

But while AB 5 may be bad policy, PADSA isn’t much better. The proposed answer by several gig economy giants would allow ridesharing and delivery companies to continue classifying their workers as independent contractors by creating yet another exception for specific app-based employers. This approach fails to address the increased employment costs facing other companies and exacerbates the problems of government favoritism created by AB 5.

Furthermore, PADSA has additional provisions designed to curry favor with voters. It would require affected companies to pay their workers 20 percent more than the minimum wage, as well as 30 cents per mile for vehicle expenses. Companies would also be required to provide a healthcare stipend, various types of insurance, and an earnings guarantee. While this may seem like a heartwarming compromise from profit-hungry tech companies, it would also—perhaps inadvertently—increase their potential competitors’ costs, helping the already-entrenched companies to maintain their industry dominance.

Uber, Lyft, DoorDash, and other gig economy titans may be able to afford the costly requirements imposed by this new law (or find ways to pass some costs onto their workers or customers). Compliance will be more difficult for smaller companies and future startups attempting to compete with the major players. Economists call this barrier to entry “raising rivals’ costs.” It is a primary element of regulatory capture—the counterintuitive (and common) instance where regulation comes to serve regulated corporations rather than the general welfare.

Instead of creating more exceptions, California should consider solutions that would address larger problems facing workers.

Anti-competitive legislation like PADSA would help solidify the dominance of the gig economy’s largest players, leading to less future innovation. This would be especially ironic since Uber and Lyft’s success comes from winning out over another stagnant industry with influential political connections: taxicabs.

Instead of creating more exceptions to muddy the waters of the labor market, California should consider solutions that would address larger problems facing workers, like increasing access to family-friendly flexible schedules. In fact, in the rapidly evolving economy of the 21st century, it may be time to reconsider whether worker classification even makes sense anymore.