California regulation could drive ridesharing companies out of business

A California judge recently ordered “Uber and Lyft to reclassify their workers from independent contractors to employees with benefits.” While proponents of the new reclassification argue that it will help drivers, they fail to see the unintended consequences this policy will have for drivers and society at large. The reclassification will drive up Uber and Lyft costs. If applied across the board, it would potentially push them to the brink of insolvency, but for now Uber and Lyft are planning to exit the California market if the ruling is not changed.

Either way, the reclassification would terminate drivers’ access to gig work at least in California, which has experienced a particularly large surge in unemployment over the pandemic.

Proponents of reclassification argue that gig workers are being taken advantage of by tech companies and ought to receive the benefits of full-time employees. But, according to Uber and Lyft spokesmen, many of their drivers actually prefer the flexibility of a freelancing to the responsibilities that come with full-time employment.

Flexibility isn’t just a perk, it’s a big part of the reason people choose to participate in the gig economy. Many drivers are on the roads as a side gig to buffer against unanticipated fluctuation in their income. Ridesharing income generally replaces 72 percent of the income losses that may arise due to declines in employment or layoffs associated with an individual’s main job. Independent contractors were never meant to be treated the same as full-time employees. That’s why Seth Harris and Alan Krueger proposed back in 2015 a third definition altogether, rather than trying to force a comparison where none really exists. 

Policies that require companies to treat gig workers like full-time employees will increase costs significantly for firms. Depending on how the response to the ruling unfolds, it would either put ridesharing companies out of business or, at the least, push them out of the California market, harming the very drivers the very drivers the ruling seeks to help. Even if Uber and Lyft could survive, financial considerations would force them to respond by limiting the very flexibility that drivers value, capping drivers’ time and limiting the geography that they can travel. 

Another concern with the new ruling is that it expands the authority and precedent of the courts to rule how companies should compensate their workers. Questions of compensation should be left in the hands of the free market. Allowing companies the freedom to decide for themselves how they compensate workers makes for a dynamic job market in which workers have options. 

Offering unique benefits is how firms are able to differentiate themselves in the marketplace. For example, Arizona State University partnered with Uber to offer their drivers free access to ASU Online, which provides an unprecedented opportunity for these drivers to upskill. It’s this competitive differentiation that leads to a thriving market. 

If courts take an increasingly active stance on defining the terms of compensation for companies and their workers, we’ll see less of a portfolio approach and more of a one-size-fits-all approach to regulating the way firms interact with and compensate their employees. That means workers will have less choice and flexibility, which they clearly value. Given the surge in remote work and the digital economy, particularly as a result of the pandemic, now’s a particularly bad time to usher in these kinds of changes. 

In addition, my ongoing research has found that ridesharing services have been adding value to society at large and contributing to a rising standard of living. For example, between 2010 and 2016, housing prices in metropolitan areas grew by 2.9 percent following Uber’s entry into the market, a clear indication of the value the service added. My colleague Yong Paik and I estimate that ridesharing services are delivering roughly $795 million in benefits net of costs to consumers. 

Moreover, the latest data from the Treasury shows a steady increase in the number of workers participating in gig work. If people felt gig work was taking advantage of them, why would so many people be joining it? The reality is that technology is expanding the ways that people can work and collaborate with one another, allowing people to juggle multiple professional commitments more efficiently than before. That has value.

If policymakers crush the incentives for firms to hire gig workers, many of these gig workers will likely be out of work. Moreover, if drivers are considered employees, will California regulators subsequently turn on Upwork.com, a large freelancer matching platform, and their counterparts? This would deal a large blow for many workers who count on freelancing to diversify their income stream, especially during the pandemic. For example, a recent survey from Freelancer found that job postings for freelancers grew by 25 percent between April and June.

We shouldn’t paint an overly rosy picture of gig work: There are clearly issues that should be discussed and addressed so that companies cannot take advantage of workers in less competitive sectors. But neither should we pursue large-scale policy changes that are likely to have large-scale unintended consequences on the very workers we’re trying to help.

Christos A. Makridis is an assistant research professor at Arizona State University, a non-resident fellow at Baylor University and a senior adviser at Gallup. Follow him on Twitter @camakridis.