Asian ride-hailing startups Grab, Gojek and Didi Chuxing are watching nervously for any signs of a ripple effect on the gig economy from a newly passed California law that requires companies like Uber and Lyft to treat drivers as employees, eligible for benefits and wage protections which could be costly.
Under the new legislation, signed Wednesday by Gov. Gavin Newsom, independent contractors are limited to those who have established an independent trade or business, whose work does not form part of a company’s core business, and whose job is not under the direct control of the hiring company.
Workers failing to meet any one of those criteria will be classified as employees guaranteed minimum wage, paid sick leave, health insurance benefits and other protections. The new law will take effect January 1.
“As one of the strongest economies in the world, California is now setting the global standard for worker protections for other states and countries to follow,” California State Assemblywoman Lorena Gonzalez, who authored the legislation, said.
The number of so-called gig workers is on the rise globally as people are attracted to a lifestyle where work is not tied down by time or place. In Southeast Asia, ride-hailing unicorns Grab and Gojek have 4.5 million and 1.7 million drivers respectively, already on par with Western front-runners Uber, which has 3.9 million drivers and Lyft, with 2 million.
Protections for those class of workers in Asia are mostly meager.
In Indonesia, the largest ride-hailing market in Southeast Asia, the gig employment paradigm has already sparked protests by Gojek and Grab drivers demanding labor rights, including one last March, when thousands rallied in front of the Merdeka Palace in Jakarta. The rule change in California could serve as an example and encourage them to ask for more.
But workers’ rights do not seem like a priority for the Indonesian government. As one of the rare unicorns in the region, Gojek is in good standing with Indonesia President Joko Widodo, who sees startups as crucial to the economy.
China’s Didi-Chuxing enjoys a similar advantage, as Beijing has shown general support for the sharing economy and expressed willingness to shoulder some of the welfare responsibility alongside businesses.
This year, China’s State Council moved to lower rates of required social security contributions paid by employers and pump more state capital into the country’s welfare system, in a broader effort to “ease the burden of businesses and energize market entities.”
This means that Didi Chuxing, which is simultaneously backed by SoftBank Group, Alibaba Group Holding and Tencent Holdings, may have more breathing room than its western counterparts.
Uber and Lyft are the poster children of the gig economy. Their business models hinge upon matching riders with drivers who sign up as independent contractors. Hiring drivers as employees will come at a hefty price for both companies, neither of which has posted an operating profit since the first quarter of 2017, the earliest period with verifiable earnings data.
According to Barclays estimates, under the new legislation, Uber will be forced to pay $500 million in extra annual costs, while Lyft will shoulder another $290 million a year. Morgan Stanley predicts that Uber will experience a 35% rise in costs associated with drivers. If those expenses are passed on to customers, rides in California will be up to 25% more expensive, which would lead to a 1-2% reduction in overall reservations.
This article first appeared on Nikkei Asian Review. It’s republished here as part of 36Kr’s ongoing partnership with Nikkei. 36Kr is KrASIA’s parent company.