Reference no: EM133172185

California's AB5 On January 1, 2020, a new law, AB5, took effect in California reclassifying many independent contractors as employees. The law aimed to force gig economy companies like Uber to offer their workers rights like minimum wage, overtime, and paid leave, which labor unions have been advocating for years. Uber had previously stated that it would follow AB5, but rather has so far only attempted to prove that the law's legal framework does not apply to its drivers.24 In 2019, before the California law came into effect, Uber joined with Lyft and DoorDash to file paperwork for the Protect App-Based Drivers and Services Act, as an attempt to block the upcoming law. This initiative sought to define an app-based driver as an independent contractor based on multiple criteria. It argued that if the entity, such as Uber, did not require the driver to work or be on call for specific hours, did not require the driver to accept any specific rideshare or delivery request to remain active, and did not restrict the driver from working on other apps, that said driver should not be considered an employee. The initiative also aimed to amend certain issues that led to AB5 being passed, including requiring employers of independent contractors to provide a healthcare subsidy and a guaranteed minimum earning equal to 120 percent of the current minimum wage. The initiative also addressed a per-mile compensation to be adjusted for inflation, workers' compensation for on-the-job injuries, discrimination protections, criminal background checks for drivers, zero-tolerance drug and alcohol policies, and driver safety training. As of this time, the status of the Protect App-Based Drivers and Services Act is still pending.25

KHOSROWSHAHI'S DECISION Uber had many areas to keep an eye on regarding their future operations, but as of late spring 2020, the immediate challenges were the classification and safety of its workers. Many gig economy companies were facing the similar issues, and some had already joined with Uber to fight the pending implementation of the California legislation. Going forward, Uber's CEO Dara Khosrowshahi needed to decide how Uber should continue to operate in California, and do so safely, given the unknown ramifications and duration of the COVID-19 pandemic. One option under consideration was to interpret AB5 as legislation that would include all Uber drivers and reclassify all California drivers as employees on their payroll. This option could be very costly to Uber, which had posted a net profit in only one fiscal year since 2016, as seen in Exhibit 4. Under this option, Uber would be required to pay for employee benefits such as paid time off and medical insurance and workers' compensation, all of which would add to the current liabilities on its balance sheet. Uber's current liabilities had already increased since 2017, as shown in Exhibit 5. This option was also not ideal for most drivers, especially those that already had another job with a set schedule and were driving to supplement their incomes. As an employer, if Uber saw it to be fit, it would have the authority to set the hours and locations that drivers were required to drive. Khosrowshahi's second option was to ignore AB5 and continue business as usual in California. This option could be detrimental to Uber, as labor unions were adamant that the gig economy workers should be reclassified as employees with all of the benefits that would accrue to being paid workers. Ignoring AB5 could possibly result in a future court ruling that Uber drivers must be included in the umbrella of workers that California's AB5 covers. Failure to comply could also ultimately result in the termination of Uber's services in the State of California. Khosrowshahi's third option was to hire lawyers to advocate on its behalf that Uber drivers "are independent contractors and do not fit the definition of an employee," therefore AB5 does not apply to Uber. Mindful that Uber had experienced more than a few legal and ethical controversies surrounding its operations, navigating the legal route to classifying their drivers was expected to play a major role in determining whether or not Uber would be allowed to operate in California, not to mention in other states considering similar legislation down the road.

1. What are Uber's options in handling California AB5, an attempt to reclassify Uber's drivers as employees? What potential impact would each decision have?