California Applies Brakes to Galloping Gig Economy

California Assembly Bill 5, which would require many businesses to hire workers as employees rather than independent contractors — and reclassify their existing workforces accordingly — has passed its second reading.

The State Assembly will vote on amendments in a third reading and then send it to Governor Gavin Newsom, who has indicated he will sign it into law.

Bill AB 5 extends the so-called ABC test California imposed last year in the Dynamex case, which presumes that all workers are employees eligible for benefits unless their employer establishes that they meet standard criteria for independent contractors.

“It is also the intent of the Legislature in enacting this act to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave,” the bill provides.

“By codifying the California Supreme Court’s landmark, unanimous Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law,” it states.

The likelihood of the bill becoming law means that to operate in California, Uber, Lyft and lots of other app-based gig companies that hold costs down by using independent contractors may have to rethink their business models.

Under AB 5, photographers and freelance writers must submit work to any one company no more than 35 times a year to continue to be classified as freelancers.

AB 5 excludes several professions, including doctors, lawyers, dentists, architects, insurance agents, real estate agents, investment advisers and securities broker-dealers or their registered agents and representatives, engineers and accountants.

Tempered Reactions

Reactions to the bill were mixed. Uber and Lyft drivers were ecstatic, but many others were uneasy about its implications.

“The California State Legislature admits that their heavy-handed ‘solution’ may not be good for everyone due to the multiple, last minute, exemptions that were added to this bill,” said iPSE-U.S. Co-President Mike Bishop.

“If you’re acknowledging that your solution doesn’t work while you’re drafting it, it’s time to stop and rethink your solution,” he told the E-Commerce Times. “Otherwise, you’re forcing a square peg into a round hole.”

AB 5 “is anti-worker, pro-union,” said Ray Wang, principal analyst at Constellation Research.

“It makes it harder for folks to go out on their own as entrepreneurs. It’s also a life support to mass transit and big union lobbyists,” he told the E-Commerce Times.

“There is an anti-tech backlash,” Wang continued, and AB 5 “is overreach in response by a state legislature that keeps messing up what works — tech startups and entrepreneurs — and avoids fixing the things that are broken, such as homelessness, petty crime, drugs.”

The bill “borders heavily on making everyone employees, which will impact independent workers’ incomes and increase the cost of services,” observed Hollie Heikkinen, CEO of iWorker Innovations.

It will “drastically increase the cost of goods and services, which will deter people from using the services,” she told the E-Commerce Times. “So this push that some are calling a win will ultimately result in these newly deemed ’employees’ not having a job at all.”

As a comparison, when the Affordable Care Act mandated that employees of companies with 50 or more full-time employees offer health insurance coverage to those who worked at least 30 hours a week, many businesses cut their employees’ hours to 20 a week or less.

There’s concern that opportunities for freelancers might dry up due to the new law.

The U.S. freelance workforce grew by 3.7 million between 2014 and 2018, to total 56.7 million people, according to a survey conducted jointly by Upwork and Freelancers Union.

Americans were spending more than 1 billion hours per week freelancing, according to the survey.

Meanwhile, the traditional U.S. workforce only grew from 103 million to 105.3 million during that period.

“The irony is, Silicon Valley invented and enabled the gig economy, and now California may very well kill it,” noted Holger Mueller, principal analyst at Constellation Research.

“Increasing labor costs will drive enterprises to look for automation,” he told the E-Commerce Times.

Benefits for workers is an issue, because “we are the only industrialized country in the world who ties benefits to employment,” noted Carl Camden, president of iPSE-U.S.

“The United States has a discriminatory two-class system where employees have access to benefits while independent workers have great difficulty accessing benefits,” he told the E-Commerce Times.

California’s economy may be hit as gig employers pack up and leave. There already is an exodus of workers from California to other states and cities, Constellation’s Wang said.

Passage of similar bills in other states could give them pause, however.

“I see other states following suit immediately,” Bishop predicted, “especially in the year of a presidential election when we have many of the presidential primary candidates weighing in on this bill and other similar measures percolating around the country.”

Another View of AB 5

“AB 5 codifies the Dynamex case, which is already the law of the land,” employment lawyer Richard Vaznaugh pointed out.

The law protects employees in many ways, but “independent contractors have none of these protections,” he told the E-Commerce Times.

“Some businesses lobbyists have been complaining that California’s economy will be damaged by worker protections for decades,” Vaznaugh said, “but the facts speak for themselves. California has been among the most protective for decades, and it’s the most prosperous state in the union and, by itself, the seventh largest economy in the world.”