California’s AB 5 ruling: putting the focus on contract workers in India

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From Friday morning, Californians would have been unable to order a cab through two of the largest ride-sharing services in the States: Uber and Lyft. Both companies decided to voluntarily shut down their services in the state after a judge ordered them to re-classify their drivers as employees from contractors within 10 days early last week. The judgement came on the back of a bill that the Governor signed last September – the Assembly Bill 5 (AB 5). Under the bill, California required companies to re-classify their independent contractors as employees. 

The difference between a contractor and an employee is fairly intuitive. A contractor works by the hour and can have many clients. An employee has a set amount of hours and works for one company. But, generally the difference boils down to which party owns the primary decision-making power. Does the worker decide the rate of pay? How does the work-relationship (scope of work, rate etc.) change over time? A defining feature of an independent contractor is if their decisions have significant impact on opportunities for profits and losses, according to the Harvard Business Review. Oh, and there’s also the employment benefits that come – leaves, health cover etc. 

In this case, the bill directs the companies to classify independent contractors as employees on the basis of three conditions, called the ABC test. Under the test, workers can only be classified as independent contractors if the workers: 

  1. are free from control and direction by the hiring company, and
  2. perform work outside the usual course of business of the hiring company, and
  3. are independently established in that trade, occupation or business.

Workers who don’t meet all three of these conditions must be classified as employees and the company will have to fulfill all wage and employment protections. While Uber certainly has some rules that the driver must abide to, they are free to come and go as they wish, can disregard the bonus incentives etc. They most likely satisfy condition A. They also regularly drive for other services, including Lyft, DoorDash etc., which means they satisfy condition C. To mitigate the risks posed by not fulfilling condition B, Uber contends that its business model is not driving people around, but “serving as a technology platform for several different types of digital marketplaces”. Initially, Uber was positive that they would meet all the three conditions. Clearly not.

The bill also came with a long list of exemptions (51+ job types and the entire construction industry). While this has led to some speculations that this is a political assault on “big-tech” and the “gig-economy”, it has also led to well-warranted discussions on worker rights and protection. 

Between a rock and a hard place

That’s been the state of the Indian employment market for a long time now. Unemployment is at an all-time high, and women’s participation in the workforce on a steep decline

Even in terms of quality of employment (we can all agree that given the social security measures, an employee is far better off than a contractor), India has been on a worrying trajectory. In the USA, the share of temporary workers is estimated at around 4% by the International Labor Organisation. Another estimate in a paper published in the NBER suggests the share of non-regular employees at 15.8%. In India, that’s as high as 77%.

The trajectory of contract workers has been on a rise even in formal industries. With laws being amended to make it easier for firms to hire contract workers, the share of contract workers in the past two decades has doubled. The government conducts an Annual Survey of Industries of all firms employing more than 10 workers throughout the country. In the year 2015 (latest for which unit-level) data is available, the share of contract workers to total workers was 35%. Put another way, in formal manufacturing industries, one out of three workers are contracted and not employed.

In the 17 years between 1997-98 and 2014-15, the compounded annual growth rate of directly employed workers was a meagre 0.55%. CAGR for contract workers over the same period: 6.79%. 

It’s evident that employers prefer contractors. It’s cheaper. When companies hire full-time employees, they’re required to pay more than the minimum hourly wage or the yearly salary. This includes various employment benefits like PF, pension, gratuity, healthcare and maternity benefits. Additionally, there are expenses related to on-boarding such as recruiting and training costs. Estimates put the real cost of an employee to about 1.25 to 1.4 times the base salary. 

For Uber, driver expenses are a huge part of their balance sheet. Their take rate (revenue as percentage of gross bookings) has hovered about 20-25%. This means, that for a Rs. 100 Uber ride, Uber gets to keep about Rs. 20-25. Over the past year, 77% of its $40 billion in revenue  went to driver expenses. Conforming with AB 5’s direction, would mean Uber’s EBITDA margin goes from 5% to negative 14% (🔒), squeezing its bottom lines considerably. 

Back in India, preference of hiring contractual workers over permanent employees holds. As per the Business Responsibility Reports filed by the Nifty 500 companies in 2018, the preference to hire contractual employees varies by industry. For obvious reasons, manufacturing companies had a higher share of contract to permanent workers. Automobile companies had the highest median percentage at 133%, with auto-parts supplier Minda Corporation the highest, hiring more than 10,000 contract workers for about 2,600 permanent employees. Hero MotoCorp hired 23,000 contract workers for about  8,500 employees on its payroll. 

Employee conditions in India can in no way be compared to the USA. Less than a fourth (22.8%) of India’s labor force have regular wages or are salaried. 25% of all workers are employed as casual labourers with no written job contracts, no access to paid leaves and social security benefits. 

Even among non-farm jobs, states like Andhra Pradesh (36.9%), Tamil Nadu (33.5%) have more than a third of their workers working as casual labor. In fact, in Andhra Pradesh, Rajasthan and Punjab, more than 50% of non-farm workers have access to neither any paid leaves, nor a written job contract and no social security benefits. 

The government has consistently made it easier for companies to hire contractual workers. They’ve also tried to establish pay parity for contract workers. However, there’s mounting evidence and research that contract workers are paid significantly lower than regular employees. In fact, an article in the journal of the Central Statistics Office estimates that contract workers are paid 60% less than directly employed workers. 

More companies are hiring workers on a contractual basis with lesser pay sans the social security benefits. These trends in data strengthen the case for state-sponsored universal healthcare all the more. The most basic of all safety nets, healthcare is also the leading cause of personal and household bankruptcies. 

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