The Backdoor Move Uber and Others Are Using to Shape Labor Rules

It was a potentially sweeping proposal from a Texas regulator: Companies that use a “digital network” to dispatch workers the way Uber does could label them contractors rather than employees.

The proposal, made in December, was a turning point in a campaign that has played out in legislatures and courts in numerous states, and even in Washington, as Uber and other gig-economy companies have risen to prominence in recent years.

Lobbyists involved in this state-by-state effort have worked behind the scenes to provide rule makers with a template. Hanging in the balance could be billions of dollars in costs, and even fundamental business models, as more gig companies move toward public stock offerings.

When such companies are able to classify workers as contractors, they don’t have to contribute to unemployment insurance or workers’ compensation, or heed minimum-wage and overtime laws. Industry officials estimate that a work force of employees costs companies 20 to 30 percent more than a work force of contractors — a sum worth many hundreds of millions of dollars per year to Uber.

Worker advocacy groups say the goal is to chip away at classification rules in enough places to create pressure for a broad exemption nationally.

What is notable about the Texas initiative, which would apply only to unemployment insurance, is that it emerged not from a democratically elected body but from an opaque bureaucracy. There were no hearings where outsiders were questioned, no meaningful floor debates — just a few perfunctory statements at public meetings and a 30-day comment period before the agency could issue a final proposal.

“This whole thing caught us by surprise,” said Jose Garza, executive director of the Workers Defense Project, a nonprofit group in Texas that helps workers fight wage theft and misclassification.

For weeks, the impetus for the rule was unclear. A spokeswoman for the agency, the Texas Workforce Commission, publicly denied that it relied on “outside sources” when drafting proposals.

But that narrative abruptly changed in early March when Mr. Garza’s group obtained a set of emails from the commission through a public records request. The documents suggest an ambitious new phase of the campaign by gig-economy companies to solve their worker-classification problem.

Uber, Lyft and Handy argue that their workers should be considered contractors because the workers decide when, where and how long they work. The companies say they are experimenting with ideas, like benefits, to improve workers’ economic security.

But skeptics argue that the companies exert control through ratings that elicit certain behavior, like treating passengers courteously, and by barring drivers who cancel too many rides. Uber and Lyft also determine pay rates for drivers, something independent contractors typically decide.

In recent years, courts and state and federal agencies have disagreed on this question. But there’s little debate that if courts and regulators classified large numbers of gig workers as employees, the move would be highly disruptive to companies that depend on them. Lyft, in its recent filing for an initial public offering, told prospective investors that being forced to classify drivers as employees “may require us to significantly alter our existing business model” and warned of potential “monetary exposure.”

About five years ago, the gig companies began to head off this prospect. In the legislation that Uber and Lyft backed to legalize their business, they often sought provisions indicating that ride-hailing drivers are contractors. About 25 states have enacted such provisions, known as carve-outs.

In other states, Uber and Lyft worked with a broader group of companies to have most gig workers who are dispatched through digital platforms, not just drivers, classified as contractors.

One consequence of these industrywide measures is that they could affect far more than current gig workers. According to Maya Pinto of the National Employment Law Project, a nonprofit worker-advocacy group that has just published a report on the topic, the broader measures encourage companies to reclassify employees as contractors. Any business that dispatches employees — such as plumbers or electricians or nannies — could deem them contractors by using a digital interface to coordinate the work and meeting a few other criteria, Ms. Pinto said.

Marla Kanemitsu of Tusk Ventures, who has helped to write such measures, said the motivation for the bills wasn’t just to preserve the contractor status of Handy’s workers, but also to allow companies to provide benefits, like health care and retirement-savings vehicles, that might otherwise suggest an employment relationship.

“Providing benefits was always the driving force for this,” Ms. Kanemitsu said.

In the first six months of 2018, six states passed bills broadly carving out gig workers from employment laws and effectively classifying them as contractors. Mr. Tusk’s book referred to these states as the “low-hanging fruit of Kentucky, Iowa, Tennessee, Indiana and Utah (and medium-hanging fruit like Florida).”

But in other states, the fruit stood at a considerably higher altitude: The efforts came up short in Colorado, Georgia, North Carolina and California.

Colorado, with a large technology sector, was perhaps the most instructive example. The state was the first to pass legislation legalizing ride-hailing companies like Uber, and a local lobbying firm involved in that effort helped spearhead this one, too. It received more than $80,000 in 2018 from Uber and Handy, according to lobbying disclosures compiled by the National Employment Law Project. The carve-out bill glided through the Republican-led Senate on a bipartisan vote last March, but it ran into resistance in the Democratic-controlled House.

Around the same time, however, Mr. Tusk’s firm was field-testing an alternative approach.

In December 2017, Jerry Valdez, an Austin lobbyist working for Handy, contacted an assistant to one of the three commissioners on the Texas Workforce Commission.

Like most lobbyists, Mr. Valdez and his colleagues assumed a posture of extreme solicitousness. They provided detailed responses to questions from the commissioner, Ruth Hughs, and her staff — like how such proposals might comport with federal law.

“I am sure it will be informative regarding the matters discussed,” Ms. Hughs’s senior legal counsel replied in one email.

Rarely were the lobbyists more helpful than in devising the rule itself, which would effectively expand to all gig workers an exemption that the state had already passed for ride-hailing drivers.

Mr. Valdez forwarded Ms. Hughs’s assistant a draft, with the subject line “Handy proposal,” one year before the commission released its own proposal.

Of the nine criteria that the Handy draft laid out for classifying gig workers as contractors, the commission adopted seven almost verbatim, then added two. The commission also hewed closely to Handy’s definition of a “marketplace platform” and “marketplace contractor,” terms of art for “company” and “worker.”

Mr. Tusk, whose firm stopped working for Handy after Handy was acquired last year, said there were many advantages to lobbying state agencies for a rule change: “You’re not tied to the legislative calendar. If the head of a committee in the State Assembly doesn’t like it because they have some business owner in their district, you don’t have as much of a problem anymore.”

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