Today, California Governor Gavin Newsom, signed groundbreaking legislation that will have widespread impacts across the gig economy. Once in effect, the law will establish three criteria for whether a worker should be categorized as an employee or an independent contractor. Proponents of the law have celebrated it as a step toward establishing fair working conditions for gig economy workers like Uber drivers. But critics worry about the impacts on innovation, job opportunities, and costs to consumers who use services like Uber and Lyft.
In reality, the new law’s impacts will touch more than Uber drivers and gig economy workers. By creating more rules in an already rigid employment system, California’s new law could severely restrict the ability of companies and workers to find flexible work arrangements that are beneficial for both. Ultimately, it could make consumers worse off, raise prices, and lower the diversity of services available through the growing gig economy.
What exactly will the new law do?
This law codifies a previous California Supreme Court findings case by establishing a three-part test to determine if a worker is an independent contractor or an employee. Under the new rules, a worker may only be categorized as an independent contractor if the following three conditions are met:
B) The person performs work that is outside the usual course of the hiring entity’s business.
C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
In layman’s terms, this means that the company they work for must not have direct control over their work. The work they do must be different from the work typically done by the company. Finally, the workers must have established themselves in that line of work independently from their relationship with the company.
Much of the debate around this new law has been over the second requirement of the test — whether the work someone does is integral to a company’s usual course of business. Ridesharing companies have been the center of this controversy, with the question being whether Uber and Lyft will soon have to classify their workers as employees and thus provide them with workers’ compensation, unemployment insurance, paid sick and family leave, and contributions towards payroll taxes.
Uber has received criticism for claims that it will not reclassify drivers as employees. Uber drivers seem to pass the first requirement in that they can set their hours and decide how much they want to work every week. According to Lyft, “Over 75 percent (of drivers) drive less than 10 hours a week to supplement their existing job.” They also seem to pass the third test in that they aren’t required to work only for Uber — instead, they’re free to spend part of their time driving for Lyft or other competitors. According to a 2017 survey by The Rideshare Guy, 67 percent of drivers work for two or more ridesharing services at the same time.
Uber’s Chief Legal Officer Tony West stated that the new law would not automatically reclassify ridesharing drivers because drivers also meet the second requirement of the law’s latest test. Uber believes it will be able to pass the new “ABC test” to maintain independent contractor status for its drivers. He also pointed to previous court rulings that “have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”
Uber also criticized AB-5 for exempting dozens of industries, including “doctors, lawyers, architects, accountants, private investigators, commercial fishermen, manicurists, and estheticians,” who would otherwise have been subject to the test. It’s unclear why specific industries that rely on independent workers should be subject to the new rules while others can continue to operate as they did before.
Despite the focus on Lyft and Uber, the effects of California’s law will be felt across the entire economy. The majority of workers who will be impacted don’t participate in the gig economy at all. According to CBS News, 400,000 California residents work for a gig economy platform, but a whopping 1.5 million work as freelancers or independent contractors. That means that industries, as varied as construction companies, news publishers, and software companies, may have to alter the way they do business drastically.
And although California’s law is meant to provide more protections for independent workers, it could make their lives worse. Non-traditional work arrangements in America have been growing for some time now. Some of that growth has been fueled by growth in the gig economy, but technology has also lowered the cost of working with contractors across all kinds of industries. That has opened up the door for more workers to take advantage of flexible, autonomous work arrangements as independent contractors and freelancers.
Employment law in the U.S. generally creates two strict categories: independent workers or employees. But workers in America’s changing workplace no longer fit nicely into these two black-and-white categories. Instead, workers and employers are finding innovative new arrangements that are beneficial for both.
Creating more rigidity in employment law threatens to limit innovative and flexible work arrangements. But how? By increasing costs, these rules will limit job opportunities for gig economy workers, especially for those who rely on these opportunities to earn extra income on the side. As Uber’s chief legal counsel stated:
Requiring companies like Uber to classify their drivers as employees would drastically raise costs. Some estimate that requiring companies to provide benefits for full-time employees can increase costs by as much as 30 percent. Uber may have to face $500 million per year in additional expenses while Lyft might have to pay an additional $290 million each year if the companies are forced to treat their drivers as employees — and that’s just for California drivers. To make up for those costs, ridesharing platforms might reduce the number of drivers they employ, and those who work only a few hours a week would likely be the first to be cut.
Requiring workers to be sorted into two strict categories would also make life worse for consumers. Higher costs would likely be passed on to consumers in the form of higher prices for Uber and Lyft rides (among the many services offered in the gig economy) and perhaps longer wait times. It could also have more fundamental effects by reducing the number and diversity of services available to consumers in the gig economy. Ryan Vet, the founder of on-demand healthcare platform Boon, described the potential impacts on consumers:
Where does this leave the independent workers of the future?
For innovation and growth in the gig economy to continue, we must embrace a more flexible framework for how we regulate work in America. Such a structure would recognize and allow for the growing diversity of arrangements between workers and employers instead of sorting workers into just two categories.
Does all of this mean workers in the gig economy should be left to fend for themselves? Certainly not. Independent work comes with its risks and challenges, and we must find ways to provide benefits and stability to workers in this growing sector of the economy. Many companies are already working to find a path forward, through portable benefits solutions that are tied to the worker and travel with them, regardless of who they’re working for at any given time. Others have explored the potential of separating benefits from employment altogether and replacing them with universal basic income.
In the face of an ever-changing future of work, the only certain thing is change. Workers and employers across America are continually working to find new and innovative ways to work together that are beneficial for both. The best way to ensure a brighter future for American workers is to allow them to continue to experiment to find the best path forward.
CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.