By Jeff Joseph

Call it a case of missed delivery.

A California delivery start-up praised by organized labor for its use of employees rather than independent contractors announced last week it would wind down operations this summer, laying off 669 employees–including 591 drivers. The company’s implosion illuminates how California’s now-infamous Assembly Bill 5 is unworkable for the gig companies so many Americans rely on.

AB5, which took effect in January, severely reduces companies’ ability to use independent contractors and instead forces them to hire employees. Labor unions were closely involved in crafting the bill, preferring employees who can be organized into dues-paying union members over independent contractors who cannot. The negative consequences from this legal change were enormous, and have been widely reported: Thousands of independent contractors–freelance journalists, musicians, translators, therapists, and others–were suddenly stripped of their ability to earn income.

One of labor’s primary targets from AB5 was the “gig” economy–on-demand transportation and delivery companies that rely on a workforce of independent contractors to quickly connect a customer with the service they’re looking for. (Uber, Lyft, Instacart, and DoorDash are some of the large players.) While AB5 was being debated in 2019, the UPS-backed company Deliv announced it would transform its independent contractor workforce in the state into employees–hiring them through a subsidiary called Deliv California.

The unions behind the disruptive legislation were thrilled; the Teamsters union praised the company for “stepping up,” called it a model for the future, and said it would like to represent the employees. Deliv said the decision wouldn’t harm its finances: “Deliv’s ability to offer cost-effective same-day delivery is driven by its proprietary technology and unique business model, not the classification of workers.” One year later, that confidence seems misplaced: Deliv is nearly defunct, while competitor companies who rely on independent contractors report record growth.

One Silicon Valley publication was unsparing in its conclusion: “At a time when other startups in the delivery business are doing record business, Deliv Inc. is shutting down.”

To be clear, Deliv had a different business model than many of its delivery counterparts. For instance: While an Instacart customer uses the app-based service to place an order directly with a partner retailer, Deliv operated as a behind-the-scenes “last mile” delivery service for stores such as Best Buy, Macy’s, and Petsmart. In 2018, the CEO described the company as “a local UPS without the planes and warehouses.”

The process wasn’t always so smooth in operation. For instance, when Deliv and Walmart parted ways last year, TechCrunch reported that “simple tasks, like allowing customers to change pickup order to delivery…are often impossible [with third-party companies].” Similarly, drivers couldn’t communicate directly with the retailer, but instead had to go through the delivery company. (For its part, Deliv noted that it often lost money working with Walmart.) Walmart moved to its own InHome Delivery service to handle “last mile” deliveries.

Deliv faced an unusual predicament–it was unable to offer the trust and customized control of an in-house delivery service such as Walmart’s, but also unable to offer the scale and flexibility of a contractor-focused company like Instacart.

Deliv’s California subsidiary also faced hiring difficulties; after switching away from the independent contractor model, Quartz reported that “not all workers are happy as employees.” As employees, they had to abide by a dress code; they also were asked to choose hours one week in advance, instead of the on-demand flexibility offered by other gig companies. It’s no surprise that, in a recent survey of 734 gig workers by the Rideshare Guy (an independent website that features gig worker issues), 71 percent preferred to be independent contractors instead of employees.

A employer-employee relationship–especially when a union is involved–is the opposite of flexible. (I still remember my conversation years ago with our Department head after the SEIU organized adjunct faculty at a school I was teaching at; he told me my paycheck was capped because I could earn no more than the top of the union-negotiated scale.) This model also puts a cap on growth:  A new study from the Berkeley Research Group estimates an 80-90 percent reduction in app-based drivers if gig companies had to move to an employment-based model such as Deliv’s.

A contractor-focused model allows gig companies to quickly scale up to meet demand, while giving contractors the freedom to work when and where they want. Deliv’s abandonment of that model, and its subsequent closure, should be a warning sign for legislators–and a cautionary tale for other states looking to follow California’s lead.

Jeff Joseph is a professor in the Schar School of Policy and Government at George Mason University