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Days after Uber and Lyft threatened to shut down in California, only to obtain a temporary reprieve from an appeals court, the companies are reportedly considering switching to a franchise model in order to escape AB5.
AB5 was designed to grant employment benefits to gig workers, and is forcing Uber and Lyft to categorize their drivers as employees. And though it went into effect in January, both companies have not complied with it, arguing that they are not transportation businesses, but simply tech platforms.
Uber and Lyft have long considered their drivers to be contractors, meaning that drivers are responsible for their own vehicle and maintenance costs. Because of this, the companies do not pay for any benefits such as overtime, paid sick leave, unemployment insurance, medical insurance, or any other expenses.
The decision to explore a franchising model came after a San Francisco Superior Court judge ordered the companies to employ their drivers, but executives argued that they couldn’t meet that deadline and appealed the decision
Under the plan, the companies would license their brand names and technology to owners of traditional taxi fleets. The fleet owners would employ the drivers, allowing Uber and Lyft to continue to avoid the costs associated with classifying their workers as employees instead of independent contractors, as they currently do.
As the New York Times wrote, the franchising idea would be a return to the days of how groups of black cars were run. Uber is already familiar with this business model, since they currently work with fleet operators in Spain and Germany. Lyft, for its part, has presented the plan to its board of directors.
Moreover, as Slate article pointed out: “The problem of large corporations using legal strategies to skirt laws protecting workers goes far beyond misclassification and the so-called gig economy. The essence of the gig economy is control without responsibility.”
By franchising, Uber and Lyft would be following in the footsteps of franchisors like McDonald’s and Jiffy Lube, which many decades ago pioneered the legal mechanisms of gaining control over far-flung business empires without triggering legal employment relationships. As explained on Slate, these mechanisms, which are known in antitrust law as vertical restraints, are contract terms that meticulously prescribe the product offerings, hours of operation, and even the exact way workers greet the customer for each unit in a franchised chain.
David Weil, dean of the Heller School for Social Policy and Management at Brandeis University, says franchising is one example of what he calls “fissured workplaces.” In these types of places of employment, “lead” firms replace the direct employment of workers with outside contractors like temp agencies, subcontractors, and franchisees. The lead firm controls how the work is done through vertical restraints and similar legal mechanisms — but without having responsibilities to the workers doing the work. Workplace fissuring reduces wages by blocking workers from access to higher wages, career ladders, and workplace protections such as union rights with the lead firm.
As explained by Weil, he doesn’t consider solving misclassification issues will help workers in fissured industries, since they are legal employees of some company, just not the company that controls their working conditions. Under a franchise model, Uber and Lyft could still impose vertical restraints to severely limit the prices, territories, and other options available to fleet owners to make profits.
In 2014, a court ordered FedEx to stop misclassifying its drivers, and the company responded with a franchise-like model in which it outsourced delivery routes to “independent service providers” who hired individual drivers as employees. The result was hardship for both ISPs and their employees.
One anonymous source told the New York Times that Uber and Lyft are waiting to see how California’s legal situation around drivers plays out first before making any concrete decisions. However, one hurdle that the companies could face is the fact that few fleet operators in California are large enough to absorb Uber’s and Lyft’s business, in part because the taxi, black car, and other similar operations have already been disrupted by those same companies.
In the meantime, together with other gig-economy app companies like DoorDash, Instacart, and Postmates, Lyft and Uber have been funding a ballot initiative, Proposition 22, that would allow them to continue treating workers as contractors while offering them some wage and benefit guarantees.
