Regulation

New Employment Regulations Could Destroy California's Gig Economy

What happens when you reclassify independent contractors as employees?

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California legislators are taking a major swipe at the gig economy.

Last week, by a 55–11 vote, the state Assembly passed a bill called AB 5. The legislation makes it the default assumption that workers who perform services for hire are not independent contractors but employees. The company hiring them therefore must abide by all sorts of employment regulations—everything from paying into the state's unemployment insurance fund to tracking hours for overtime purposes.

"Big businesses shouldn't be able to pass their costs onto taxpayers while depriving workers of the labor law protections they are rightfully entitled to," says Assemblymember Lorena Gonzalez (D–San Diego), the bill's sponsor, in a statement released after the vote.

The bill, which now heads to the state Senate, is intended to codify the 2018 California Supreme Court decision Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which ruled that all service-for-hire workers are employees unless they can prove otherwise via the "ABC test."

The ABC test says that people are independent contractors only if they are "free from control" from the direction of their hiring entity (meaning they can decide when to work and what jobs to take), if they are performing work outside the normal scope of the entity hiring them, and if they are customarily involved in the work they're being hired to do.

Prior to the decision, gig economy companies classified their workers as contractors, on the grounds that they aren't given set hours or schedules like normal employees. If you're performing rides for Uber or dropping off meals for DoorDash, it's up to you when and how much you want to work.

That's not enough under the Dynamex decision. To satisfy the court's ABC test, for-hire workers must also be doing work that is outside the normal scope of the company that's hiring them. If a delivery company is going to hire contractors, for instance, they can't be put to work delivering packages.

Since the Dynamex decision came down, there has been a lot of confusion about what it would actually require of companies. AB 5 attempts to clear things up by explicitly stating that all of the state's labor regulations apply to workers considered employees under Dynamex.

Rideshare companies are strongly opposed to the bill, warning that it will raise prices for consumers and force them to give their new employees more regimented schedules. Lyft issued a statement saying its drivers "overwhelmingly prefer the freedom of working where, when, and how much they want. Many are moms, students, seniors or veterans and 75% of them drive less than 10 hours a week." The company adds that AB 5 "would force ridesharing drivers into shift work, eliminating the control drivers currently have over their own schedules."

Jarrett Dieterle, a fellow with the free market think tank R Street, similarly argues that the mass reclassification of contractors as employees risks destroying the flexibility that has made gig-economy work so valuable for so many.

"Most workers who become freelance contractors or join gig economy platforms do so to smooth income volatility. They are facing unexpected large expenses or a sudden reduction in household income," writes Dieterle. "Forcing contracting firms to reclassify workers as employees would make this quick access to supplemental income more complicated."

According to an analysis performed by R Street, codifying the Dynamex decision into state law would foist some $6.5 billion in additional payroll expenses onto Californian businesses annually.

The authors of AB 5 have tacitly acknowledged the sweeping changes the bill will create through the exemptions they've included in the legislation. The bill exempts health care professionals, insurance agents, stock brokers, and hair stylists (most of whom work as contractors).

More carveouts may follow. Gonzalez described her bill as "an important work-in-progress." The San Francisco Chronicle reports that many legislators who voted for the bill expect more changes to be made in the Senate to limit its scope.

In part, this is a problem created by the courts, not the state legislature. But lawmakers are leaning in to the problem by forcing contractors to abide by the state's voluminous employment regulations. They should be trying to undo the damage done by the decision instead.

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  1. You can be a contractor only if you have always been a contractor.

  2. Commifornia Lefty politicians and their useful Idiots have been destroying what made California innovative, tech friendly, and a decent place to live 30 years ago.

    This is just the latest oppressive regulatory scheme to send companies fleeing for other states.

    1. Yes for those that want the freedom and flexibility of a gig job, California says screw you.

  3. Are conservatives (such as the author) really dumb enough to fall for these ‘modern Americans crave $9 hourly jobs with no benefits or protections’ and ‘we’ll all be better off when most people are living paycheck-to-paycheck at employer whims so a few Americans can become billionaires’ arguments?

    Or are right-wingers merely mouthing those points as they struggle to try to defend conservative political preferences?

    1. Nothing says independence like being tethered to an employer.

      1. “Nothing says independence like being tethered to an employer.”

        Bingo. Corporatism is embraced by both the left and right, however the left are equally comfortable (and typically prefer) tethering people to the state as well. If politicians were truly interested in fixing health care, they would prevent employers from subsidizing/negotiating rates and sever the health insurance/employer link. For many, many people, the only reason they work shitty jobs at corporations is for the health benefits.

    2. Or are right-wingers merely mouthing those points as they struggle to try to defend conservative political preferences?

      Reply
      Fuck off charlatan.

    3. No; but we are dumb enough to believe many Americans crave personal liberty and the choice to run a business of their own, free from employer dictates of hours and benefits.
      By the way, Reverend, does your denomination pay you as an employee, or are you independent? Are your taxes full of special loopholes and exemptions for religious leaders only?

    4. No one wants a $9 an hour job, except everyone with an $8 an hour job or no job. But since businesses print their own money, lets just mandate everyone make $100 and hour and everyone will have a merry Christmas.

      You are the dumbst human being on the entire earth. Your ignorance, lack of education and shere stupidity never cease to amaze. Go die before you further infect the gene pool.

    5. $9 with all revenue tax-deductible (because I know and keep track of what I’m doing) and complete freedom to earn it is better than $12 slaving for The Man.

    6. If you want a job in California, you can get one. People choose to be independent contractors for all sorts of reasons. It may be a second vocation. They prefer control. They make more money running their own gig, say, a plumber for instance, and taking the risk vs being an employee with capped income.

      The generalizations being made show just a massive disconnect with what is actually happening in CA’s economy – projecting Uber workers’ conditions onto all contractors.

    7. “Or are right-wingers merely mouthing those points as they struggle to try to defend conservative political preferences?”

      Are all lefties bigoted assholes, or just the ones who show up here?

      1. All.

    8. You act as though it is the businesses that are forcing the employees to work contracted positions. It’s not. It is voluntary.

    9. Are all leftists that post here lying assholes, or just you?

  4. “The bill exempts health care professionals, insurance agents, stock brokers, and hair stylists (most of whom work as contractors).”

    So it is NOT about protecting poor downtrodden workers. If it were, it would protect all of them. It is about political power and forcing government regulation on every worker, and about destroying small business. (For those of you educated by public schools in the last few decades, contract workers are self employed small businesses)

    1. Nobody needs 27 different small businesses to choose from.

      1. Commifornians will feel the Bern.

    2. Can you even be a general contractor anymore? Any sub that you were to hire, in theory, is doing work within your “normal scope” – because you’re a general contractor and do every trade. Dynamex needs to be repealed, not codified. If it is ever truly enforced many, many industries are just going to break down. Inability to provide full workloads and efficient use of capital are why these relationships exist. You hire subs because you don’t have enough work for a full time electrician. Or 3 crews of concrete workers. But you have a project that can be staffed. Now I have to hire and fire employees and I can’t push any risk out?

      Can an in house legal department even hire outside lawyers without violating this rule?

      I am not certain how this thing will play out. But it will be disruptive and massively ineffecient. The tools in Sacramento think they’re gonna stick it to Amazon and Lyft or something. Perhaps they’ll end up exempting every industry besides tech.

      It is already quite difficult to find good contractors to rebuild a house. Imagine what happens when you can’t hire subs without making them employees. Probably a shitload of concentration into huge firms with massive pricing power in some industries, with shrinkage of others and contracting via affiliates in other states, reducing employment.

      Hell of a job, Dems.

  5. According to an analysis performed by R Street, codifying the Dynamex decision into state law would foist some $6.5 billion in additional payroll expenses onto Californian businesses annually.

    Isn’t the consensus among economists that the tax incidence for payroll taxes falls upon workers and not the employers who are actually writing the checks to the treasury.?

    1. Yes and this is what will happen. The drivers will take home less money.

    2. Another reason for the business owners to leave.

      1. Hate to break it to you, but Galt’s Gulch has been over-run by trimmigrants and shroomers.

  6. The biggest gang wants their cut. That’s what this is.

  7. The problem here is not treating them as employees. They are employees. The court and the state is right about that. The problem is laws that make hiring someone as expensive and legally risky as possible. California has made it as undesirable as possible for businesses to have employees and is now acting shocked the businesses are dealing with this by pretending their employees are really contractors rather than sacrificing their businesses for the good of the collective.

    1. Why are uber drivers any more employees of uber than stock traders are employees of NYSE? Both just provide a marketplace for buyers and sellers; the employees of the respective companies are those who build the platform.

      1. I think his point is that if we didn’t have so many BS laws about what must be given to “employees” this gaming of the system wouldn’t even matter, and Uber could just call drivers employees and offer them all the same flexibility they have now. But since all the dumb laws make a massive difference between contractor and employee, they can’t allow them to be employees.

    2. The state is wrong about everything.

      Every individual can agree or not to terms in exchange for work.

      The state just wants to get a cut of it.

  8. Old school progressive: we will all work for the State.

    New age progressive: what’s work?

    1. Elitist progressive: Work is what “those people” do.

  9. “Big businesses shouldn’t be able to pass their costs onto taxpayers while depriving workers of the labor law protections they are rightfully entitled to,” says Assemblymember Lorena Gonzalez (D–San Diego),…”

    Gonna go with stupid rather than clever in assigning how his pile of bullshit came about.

    1. I was trying to figure out what costs Gonzalez was talking about.

  10. Everyone is an independent contractor.

    It is just a matter of terms.

    The government wants its cut of the profits. That is what this is about.

  11. “New Employment Regulations Could Destroy California’s Gig Economy
    What happens when you reclassify independent contractors as employees?”

    What *actually* happened was corporations reclassified employees as independent contractors as an end around of labor laws.

    It’s entirely natural that legislators who believe in those labor laws would cut off the end around avoiding them.

    1. “What *actually* happened was corporations reclassified employees as independent contractors as an end around of labor laws.”

      So Uber was once a taxi company?

  12. The company adds that AB 5 “would force ridesharing drivers into shift work, eliminating the control drivers currently have over their own schedules.”

    You’re not allowed to have employees control their own schedules?

  13. Such bullocks. I hope this nonsense doesn’t spread beyond California… If anything all the laws regarding employees need to be repealed, not expanded to force everybody to be an employee. There’s no reason Uber shouldn’t be able to offer the exact same terms to people while calling them an “employee” if they feel so inclined. There should be no distinction, it should all be about the contract between the parties.

  14. […] What happens when you reclassify independent contractors as employees? Reason‘s Christian Britschgi explores. […]

  15. California government is out of control. They are trying to extort money from everyone other than their political cronies. They need to squeeze the Pleebs to prop up the decaying system. As soon as we have a hiccup in the SF Bay area tech economy and their stocks dive, there will no longer be that 10 billion plus a year in capital gains tax revenue, or payroll tax revenue, or sales tax revenue, etc…… Revenue that the state has done its best to squander on wasteful government expansion. I can’t wait. No one deserves it more than California.

  16. Why should the Gig Economy be exempt when CA is hell-bent on destroying its economy en-toto.

  17. “The authors of AB 5 have tacitly acknowledged the sweeping changes the bill will create through the exemptions they’ve included in the legislation.”
    This is basically wrecking something and then trying to make the damage less worse by adding exceptions.

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