Uber and Lyft drivers protest outside the Uber offices in Saugus, Massachusetts, as they take part in a strike pushing for pay hikes and greater job security from the two major ride-hailing companies on May 8, 2019. Jonathan Wiggs/The Boston Globe via Getty Images

A proposed California law could classify ride-hailing drivers as employees, instead of contractors, based on a three-part employment test.

Wall Street analysts say that Uber and Lyft drivers are likely to pass the test - and that the change could bankrupt both companies.

Lyft maintains that it is committed to increasing driver pay, and executives from both companies outlined a plan for drivers in an op-ed last week.

But supporters of the bill say Uber and Lyft are misleading drivers and the public about what the law could actually do.

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A trio of executives from Uber and Lyft wrote an op-ed in the San Francisco Chronicle last week responding to years of pleas from their drivers for a fairer shake.

The bosses - Uber's CEO and Lyft's founders - acknowledged that classifying as employees the more than 2 million drivers who empower the core function of their apps would be a devastating burden to their businesses. Instead, they proposed a system of "worker-determined benefits" like paid time off, retirement planning, and lifelong learning, all of which could allow drivers to maintain their independence.

And that's when the behind-the-scenes fighting began.

An example of the notifications sent to drivers in the Uber app. Uber

Shortly after the article was published, both Uber and Lyft began sending emails and push notifications to drivers, enlisting them in the corporate fight against proposed California legislation that could change many drivers' independent-contractor status to that of full-fledged employees.

A Lyft representative said that by Thursday more than 30,000 emails had been sent by drivers to state legislators, adding that the company did not auto-populate any message for the drivers, meaning each driver had to write their own message, in lieu of a prewritten call to action. Uber urged drivers to sign a petition.

What's in the proposed legislation

California's Assembly Bill 5, officially titled "Worker status: employees and independent contractors," would enshrine in law a three-part test to determine the status of a worker. That test was originally used last year in a landmark California Supreme Court ruling that's become synonymous with a company involved named Dynamex.

To hire a worker as an independent contractor, as defined by the bill, the job description must match the following three parts of the "ABC" test:

A. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. B. The person performs work that is outside the usual course of the hiring entity's business. C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Given the nature of ride-hailing drivers' jobs, it's likely they would not be considered contractors under the Dynamex test. Specifically, analysts at Barclays say the second part of the test (B) would likely be the main sticking point.

What would it mean for drivers?

If passed, the law would help drivers in California achieve what groups of drivers have unsuccessfully attempted to do in jurisdictions around the world for years: to secure the benefits and treatment entitled to full-fledged employees.

"Without these protections, drivers face low wages and labor abuses," according to Gig Workers Rising, a group representing workers on multiple gig-economy platforms, including Postmates, Uber, and Amazon. "They have no way to organize and are denied crucial benefits like health insurance, disability, overtime or workers comp. Drivers face unsafe working conditions and no recourse when they're deactivated."

A 2018 study by the Economic Policy Institute found that Uber drivers took home the equivalent of $9.21 in hourly wages, after accounting for vehicle cost, health insurance, and any other benefits that would be earned by traditional employees. Lyft says its national hourly average for drivers is north of $30 per hour while en route to a fare or while carrying passengers.

Employment status could also give drivers access to collective-bargaining rights. Their status as contractors has hampered efforts in lawsuits for years.

But the companies are vehemently opposed

Uber and Lyft maintain that classifying their drivers as employees will be the death knell to their business. They're probably not wrong.

In California alone, reclassifying drivers as employees could cost Uber and Lyft $3,625 per driver each year, Wall Street analysts at Barclays have estimated. All the associated costs, including Medicare, FICA, and other payroll items, could total $290 million.

"Beyond higher wages, ride-hailing companies would be responsible for half (6.2%) of employees' Social Security and Medicare (1.45%) tax, as well as the costs for administering any employee benefits (e.g., health care and 401ks)," the bank's analysts said in a note to clients.

"With current driver earnings and incentives running at an estimated 78% and 76% of gross bookings for Uber and Lyft, respectively, a 25% increase in driver wage/benefit costs would essentially drive take rates to zero (absent rate increases to riders)."

"We think an adverse ruling on the contract workforce issue would potentially bankrupt both Uber and Lyft," they concluded.

A Lyft representative shared the following statement with Business Insider:

"Lyft is advocating for an approach in line with the interests of our driver community, by modernizing century old labor laws that make it difficult to provide both flexibility and benefits. The goal is to preserve drivers' independence, while guaranteeing a minimum earnings floor, establishing worker-directed portable benefits, and creating a new association in partnership with labor groups to administer the benefits that best meet driver's individual needs."

Uber did not respond to a request for comment.

The bill's sponsor and supporters say the companies are misleading drivers

"Workplace flexibility is completely at the discretion of employers: whether you're classified as an employee or misclassified as an Independent Contractor," California Assemblywoman Lorena Gonzales, the bill's sponsor, said on Twitter. "Nothing in #AB5 prevents UBER or Lyft from continuing to offer their workers flexibility."

A Lyft representative maintained that nothing in the bill directly says ride-hailing companies would be forced to reduce flexibility, but added that it's a natural byproduct of such labor laws that driver freedom would be cut.

Gig Workers Rising again rejected those claims.

"Everything they said in their op-ed was a watered-down version of demands drivers have been making for MONTHS," the group said. "They're fearmongering w/drivers about losing flexibility & jobs, when the truth is you can have BOTH: real wages/benefits AND flexibility."

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