Lawsuits, Legislation Threaten the 'Sharing' Economy

California legislators want to create union privileges for independent contractors, like Uber drivers.

As an occasional cab rider in Sacramento, I've noticed something that isn't always a given: fleets of newer cabs, polite drivers and the use of modern credit card machines. This is a city where the cabs can be so shabby, the City Council two years ago passed new regulations that require drivers to have a rudimentary understanding of local geography and English, to drive non-jalopies and "be hygienically clean."

"The ordinance was written in response to reports of fistfights among cabbies, rude exchanges with customers and high-speed rides," according to the Sacramento Bee. But few would credit the new rules for a quickly improving cab-riding experience. The credit properly goes to Uber and Lyft—those ride-booking services that introduced competition.

In San Diego, pressure from these upstarts caused the city to deregulate its "medallion" system that imposed a limit on the number of cabs in the city. Because of the cartel, operating permits cost more than $100,000, which forced cabbies to work long hours (earning only $5 an hour, according to one study) paying off the cab owners' medallion fees. Now anyone who meets some basic standards is free to buy and operate a cab.

This is how markets work. The results are good for almost everybody. But there's always a market for grievances, too. Hence, some disgruntled drivers and allies of California's unions want to take away the ride-booking services' competitive advantages. A recently settled lawsuit against Lyft set out exactly what's at stake: the survival of these fledgling services. Newly proposed legislation likewise threatens to destroy the nature of the companies.

"According to newly published court documents, Lyft would owe its drivers $126 million in reimbursement expenses for the last four years if the ride-hail service classified them as employees rather than independent contractors," according to a recent article in the Verge. One could almost hear the sense of entitlement, as the article pointed to court documents that "provide a rare glimpse into the huge amount of cash that companies like Lyft and Uber save by refusing to classify their drivers as employees."

Of course, these businesses' model is based on contracting with independent drivers, who pay to access to an application that hooks up riders with drivers. Drivers can work hours that suit them, but they obviously don't get all the perquisites that come with being an employee. It's so expensive these days to hire permanent employees that contracting is a key way to build a new enterprise. No one forced any drivers to accept the terms offered by the companies.

Drivers would have "recouped about $835 each, if the company applied the standard mileage reimbursement rate set by the U.S. government," according to the article. "Leaked financial documents obtained by Bloomberg last year show that Lyft is struggling to make money: the company lost $127 million in the first half of 2015 on $46.7 million in revenue."

The irony is obvious. How would adding another $126 million in expenses help the company sustain itself? In the long run, drivers don't benefit by threatening the profitability of the company that pays them. Lyft settled the lawsuit with a more modest $12.25 million payment. But the same writer noted that "[t]he bullet that Lyft just dodged is still coming for Uber," which faces a class-action lawsuit that gets underway in June. It never stops.

Even before the suits are settled, these companies must avoid a legislative bullet by Assemblywoman Lorena Gonzalez (D-San Diego) that would give independent contractors the right to bargain collectively for benefits, as if they were full-fledged employees. It would challenge federal antitrust law, which views collective bargaining among contractors as price-fixing. Her proposal takes aim at ridesharing companies, but it would apply to other industries, as well.

Assembly Bill 1727 "would establish for eligible groups of independent contractors the right to organize and negotiate with hosting platforms." It wouldn't unionize the workers, per se, but would create associations supervised by state officials. Gonzalez says it would improve working conditions for "gig economy workers," but really, it would undermine the flexibility, cost-savings and worker independence at the heart of these platforms' success.

Many in the taxi industry would love to use the political system to hobble competitors. It's easier than outperforming them on the streets. If they succeed, however, consumers can go back to the days of lobbying city councils to pass rules requiring cabbies to dress appropriately and learn their way around town.

Competition works best. Wouldn't it be nice if California, for once, resisted the temptation to worsen its business climate?