A new law in California will make it far more difficult for companies to classify workers as contractors rather than employees. Will the rest of the country follow suit?

“Freelance workers available at a moment’s notice will reshape the nature of companies and the structure of careers,” wrote The Economist in 2015, describing the rise of what we now call the “gig economy.” Gig work has been defined in several different ways. At bottom is the notion that people take on individual work assignments as “gigs,” outside of traditional employer-employee relationships.

In 2019, California is pushing back. A new bill signed last month by Governor Gavin Newsom will make it far more difficult for companies to classify workers as independent contractors rather than employees. In a state that’s home to gig economy behemoths like Uber and Lyft, the bill could impact as many as one million workers across all kinds of industries.

Supporters of the bill say it will provide freelancers with benefits typically afforded to traditional employees, such as unemployment insurance and workers compensation. Detractors say it will significantly raise costs for businesses and hurt workers who need flexible schedules.

The debate is hardly new, and hardly confined to California. Businesses across the country and around the world have spent decades shifting from a model built on traditional employees to one that utilizes independent contractors, whether it’s to cut costs or to hire workers with in-demand skills in a tight labor market. While California has drawn attention as the headquarters of many tech platforms that rely on gig workers, labor groups are now pushing a similar bill in New York and may breathe new life into failed bills in Washington and Oregon.

Going forward, observers expect the California law to drive the debate nationally over reshaping labor laws, which many say are better suited to the industrial 1930s than to today’s more fluid, knowledge-based economy.

AB5: The California Bill
The bill recently signed into law in California, known as AB5, comes out of a 14-year-old court case in which delivery drivers in Los Angeles sued their employer for lost wages after the company reclassified them as independent contractors. In its ruling in favor of the employees, California’s highest court wrote that a business can only classify a worker as an independent contractor if it can meet a three-part test: 1) the contractor must be free from the control of the hiring entity, 2) the contractor performs work outside the normal scope of the hiring entity, and 3) the contractor is an independent established practitioner of the trade performed. With a few exceptions, AB5 adopts that definition.

Upsides & Downsides
Because the new law presumes that workers are employees unless they meet strict criteria for independent contractors, companies will likely find that many of their freelance workers no longer make the cut. That means that thousands of Uber and Lyft drivers – not to mention janitors, construction workers, home health aides, and manicurists – will have access to benefits like minimum wage and paid sick leave, and would gain the right to collectively bargain.

Experts estimate that the cost of hiring workers as employees is between and 20 and 30 percent higher than bringing them on as contractors. For Uber and Lyft, this equates to more than $500 million and $290 million, respectively – an extra $3,625 per driver in California. The companies have said they may also have to begin scheduling drivers for shifts rather than allowing them to work whenever they want, which would detract from the flexible model that makes them successful. Some ride-hail drivers are concerned as well, arguing that a self-determined schedule is critical to their income.

Other industries big and small also have financial concerns. Several trucking associations oppose the bill, and the California News Publishers Association ran full-page ads saying that having to classify part-time delivery people as employees would run newspapers out of business.

A Third Way?
Governor Newsom has said he would consider some kind of third category of worker, one who is neither a traditional employee nor a completely independent contractor, but still has certain rights and benefits. Scholars at the Hamilton Project have fleshed out one possible framework, where workers in this third category become eligible for some of the same benefits as traditional employees, like the right to collectively bargain, civil rights protections, tax withholding, and employer contributions for payroll taxes. They would not be eligible for overtime, minimum wage, or unemployment insurance, but their employers would be allowed to pool independent workers in order to provide insurance and other benefits.

Uber and Lyft have a different proposal. The companies are circulating draft legislation under which they would guarantee an income floor and provide certain benefits in exchange for being allowed to continue classifying their drivers as independent contractors.

For now, the two companies, along with on-demand delivery company DoorDash, say they plan to spend $90 million on a ballot measure in 2020 to overturn the new law. Two bills in Congress also aim to crack down on companies that incorrectly classify employees as independent contractors, although neither appears likely to gain traction. The California law goes into effect in January of 2020, and the rest of the country will undoubtedly be watching to see how it goes.

Learn More

Portable Benefits: The founder and former head of the Freelancers Union argues that in an economy where gig work is increasingly common, tying benefits to a single employer makes no sense – via New York Times

Silicon Valley’s Secret: One writer argues that the tech industry is padding executive profits by unfairly relying on contractors instead of employees – via CNBC

A Case Study: California’s cannabis delivery industry offers a case study for what happens when contractors become employees. Some workers appreciate the change, while others do not – via The Atlantic

Long-Term Trends: Tech reporter Kara Swisher talks to a former labor reporter about the gig economy, the risks of relying on contractors, and apps that steal tips – via Recode

Retirement Crisis: Americans are already behind on saving for retirement, and gig workers are even further behind. Ideas like Open Multiple Employer Plans could help – via Fast Company