California’s Assembly Bill 5 (AB5) is intended to classify more independent contractors as formal employees. The goal is for workers to get higher wages and benefits. It is aimed mostly at rideshare and food delivery companies like Uber, Lyft, and GrubHub, but thousands of other workers are losing their jobs in other fields from journalism to entertainment to business consultants. These unintended consequences are almost exactly what Ryan Radia predicted in a CEI study published shortly before AB5 came into effect.
Part of AB5’s problem is that it comes from a fundamental misunderstanding of the labor market. It treats workers as either contractors or formal employees, but that is not an either/or question. The labor market is a wide-ranging spectrum, not a simple binary. There are all kinds of in-betweens, nuances, and complications.
AB5 uses what is called an ABC test to determine if a worker is an independent contractor or a formal employee. It consists of three questions:
- How closely is each worker supervised or directed? Do they check in with a boss every day? Or do they work mostly on their own and have wide discretion on how to do their job?
- Is their work part of the company’s core business? For an Uber driver, the answer is yes. For an accountant or a maintenance worker, maybe not.
- Is the hiring company the contractor’s sole or dominant customer? Is the job mostly in the contractor’s area of specialty or expertise?
The bill text is vaguely worded. In practice, nearly any freelancer qualifies as a formal employee under AB5. But a lot of job arrangements are somewhere in between.
Legislators have come up with two categories to describe a spectrum with countless categories. AB5 is a clunky piece of legislation, and thousands of workers are paying the price.
Take actors, for a classic California example. Acting is a classic gig-oriented job. But some actors have steady gigs. Filming a one-off movie or commercial is almost surely in the independent contractor category. But what if an actor has repeat dealings with the same studio? In the old days, many actors had exclusive contracts with a studio, and were likely employees under most reasonable definitions. But what if an actor has a non-exclusive contract but still appears in multiple films in the same movie franchise, like the Marvel Cinematic Universe? Where should that fall on the ABC test? It could go either way. Under AB5, politicians make the decision, not the employee.
What if an actor works on two or more unrelated films with different producers and directors, but that are produced by the same studio? Or multiple movies with the same production team, but released by different studios? Are those treated differently than the Marvel movie actor under the ABC test? Workers don’t get to make that choice under AB5.
What if an actor becomes a regular go-to person for an advertising agency and does regular commercials for them, but never signs a contract and does other acting work, too? At what point on this broad spectrum does the actor pass from one category to the other? It will take years of case-by-case political decisions, and likely many lawsuits to give clarity to AB5’s broad wording. Many workers just don’t have the time or money to be without work while these new problems wind through the court system.
And it’s more than Hollywood actors. The Los Angeles Times reports about how AB5 is affecting fine artists:
We received more than 120 responses from artists across California — jazz and classical musicians, directors of arts nonprofits, magicians, costume designers, actors, a burlesque dancer and freelance food stylist, among others.
The overwhelming majority said AB5 is hurting their careers. Many are unsure how to comply with the law. Others are cutting back on programming or canceling services because of the cost required to convert independent contractors to employees.
This is the same spectrum problem. Rather than trying to fit real-world people into tidy regulatory categories, policy should allow workers to choose their own work arrangements.
The old workplace ideal of the 1950s doesn’t apply in the 2020s. Back then, the ideal was to have a Monday-to-Friday job, first shift, always at the same office, with everyone on the same company insurance and pension plan. And where possible, the gig was often intended to be for life, or at least until retirement.
Today’s workers want more diverse choices than their parents and grandparents had. Some people like the traditional model; it’s still there for them. Other people like being able to work from home or from a café some days. Other people like the kinds of jobs available in big cities like New York, but don’t necessarily want to live there. According to GlobalWorkplaceAnalytics.com, the number of telecommuters increased 173 percent from 2005 to 2019.
Not everyone wants to work traditional hours. For people with young kids or other family responsibilities, or who are in school, that is often not possible. Other workers do want a 40-hour schedule, but prefer to work four 10-hour days instead of five eight-hour days to get an extra day at home with kids.
Many rideshare drivers are retirees who want to have something to do, but don’t want scheduled hours. Others are people who are between jobs and use ridesharing as a way to make ends meet while they look for their next 9-to-5 gig. AB5’s rigid categorization hurts these workers at various places along the contractor-employee spectrum.
Other workers want more flexibility with their benefits. Don’t like the company health insurance plan? Would you prefer a different retirement savings plan? Tough, say AB5 supporters. Some workers prefer higher wages with fewer benefits. Other workers prefer the opposite. It is much more difficult for employers to accommodate diverse preferences under AB5.
That’s the main reason why independent contracting is becoming more popular. The old model doesn’t fit everybody, so everybody shouldn’t be fit into it. Contractors can choose an insurance and retirement plan that fits their family’s needs and that they can take with them wherever their career takes them. Under the traditional model, if you lose your job, you lose your insurance at the worst possible time. Formal employees who frequently change jobs have to endure hours of unnecessary paperwork changing benefit plans. Independent contractors are spared those headaches.
Californians are learning the hard way that the labor market is a diverse spectrum, not a simplistic two-lump model of contractors and formal employees. Unfortunately, the rest of the country might soon copy California’s mistake. New York is mulling its own version of AB5. The House of Representatives recently passed the PRO Act, which contains a federal version of AB5’s ABC test. After seeing California’s experiment, hopefully legislators will reconsider.