California's Politically Powerful Unions Aim To Crush Sharing Economy
A state Supreme Court ruling sets a new, higher bar for determining when workers can count as independent contractors rather than employees. It might ruin some online firms' business models.
Free-market economists love to talk about "creative destruction." Brilliant new ideas flourish and creative entrepreneurs find better ways to serve customers. Encrusted, poor-performing businesses recognize that if the new "thing" takes off, their old cash cow might be destroyed. Rather than play fair and up their game, the Old School folks turn to government, courts, or even violence to crush the emerging competition.
Think of that age-old battle between new ideas and established industries as a cat-and-mouse game, or that Looney Tunes cartoon where a determined Wile E. Coyote tries to ensnare Road Runner. We always assume that the forces of creation ultimately will evade the predators. We've all become accustomed to an immeasurable number of innovations, after all. But what happens when cat catches mouse or coyote grabs the bird? We are about to see.
Because of the far-reaching California Supreme Court decision last year known as Dynamex, and legislation now winding its way through the state capitol, some of the newest and most innovative businesses are facing an existential threat from shrieking violets who tremble at the sight of competitors. The case involved a same-delivery service that turned its drivers from employees into contractors, but it applies to many of the state's most-popular companies.
Basically, California unions have unparalleled political power and are about to force companies with business models based entirely on using contract labor to replace those workers with full-time, benefited employees—and to follow a labor code designed more for a 1950s-era factory workforce rather than a modern, flexible one.
Web-based entrepreneurs have dramatically improved our lives and done so with a quickness that's quite astounding. Remember when the only way to get to the downtown area from an airport was to wait in a queue for an expensive and uncomfortable taxicab—or hop on a crammed shuttle that crawled from stop to stop? Now you type a destination on your phone, a friendly driver in a late-model car picks you up and the trip is billed automatically.
This is life-changing stuff. My 84-year-old mom gave up driving after Uber and Lyft solved her mobility problems. When she needs groceries, she uses an app that delivers them to her door. My daughter needed to move to a new apartment. "I don't need your truck, Dad." She used the Lugg app, which dispatched a team of contract haulers. I rarely go to the store. I order everything from cat litter to car parts on Amazon Prime. The order shows up at my door the next day.
Those conveniences might be going away—or getting far more expensive—here in innovation-loving California. In that Dynamex decision, California's high-court justices crafted a strict "ABC test" to determine when a company may use contractors rather than workers on the full-time payroll.
The only way a company can use contract labor is if a) the company doesn't direct the worker's performance; b) the worker provides work that's not central to the company's business (i.e., a transportation company that contracts with a plumber); and c) the worker intends to operate an independent contracting firm. Few of these newfangled companies can meet all three standards.
These businesses exist because they figured a way around poorly designed systems that have crushed creativity and competition. Don't give me any nonsense about the unfairness of letting upstarts evade the rules. The rules were never created to be fair. Taxi companies, for instance, back the medallion system, whereby government limits the number of cabs that can legally drive on city streets.
They do so to limit competition and enrich themselves despite the blather about protecting public safety and workers' rights. In San Diego, a report showed that the medallion cost was so high that cabbies spent dangerously long periods of time on the road and averaged only $5 an hour. These app-based companies have opened up a new world of flexible hours and unlimited opportunities.
The Legislature could fix the Dynamex problem but instead is embracing a union-backed measure (Assembly Bill 5) that would codify the decision and apply it to all businesses. Many emergent tech companies are not yet profitable, so adding massive new employee costs could spell doom. The big question is if their lobbyists can secure exemptions that let them hobble along. But think of all the unknown innovators that will never get off the ground if this retrograde measure passes.
I'd like to think that the fresh breeze of innovation will always win out over the dark forces of protectionism and decay. But that's not necessarily going to happen. With Dynamex and A.B. 5, Wile E. Coyote really does have Road Runner by the throat. Soon enough we'll see if the bird can wriggle out from his latest jam or will end up like the rest of us – waiting in a long line for a dirty and expensive cab that can't figure out how to take our credit card.
This column was first published by the Orange County Register.