The Cost of Ending Independent Work

The California legislature managed to pass a near statutory prohibition on independent work in misguided bid to “protect workers.” Lawmakers achieved this outcome by redefining the critical legal distinction between an employee and an independent contractor. Worse, the law is retroactive and will subject businesses to damages they could not possibly have anticipated or, likely, afford.

Progressives claim some employees are “currently exploited by being misclassified as independent contractors instead of employees.” Even if that is so, forcing almost all independent contractors into employee status is hardly the solution. In fact, it may cost many jobs and spawn endless litigation.

Anecdotally, many individuals have said they feel far from exploited by working as an independent contractor. Pasadena physical therapist Dawn James told the Los Angeles Times, “As a professional with two doctorate degrees, I really don’t believe it was meant to include me.”

Los Angeleno spoke with several Uber drivers who said they do not want to become employees.

Lawmakers are out of touch, and drivers value the flexibility driving for Uber offers, which allows them to meet family obligations.

California legislators disregarded these concerns. On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 into law. It imposes a new test to determine whether a worker is an employee or independent contractor. In summary, a worker must satisfy all parts of the so-called ABC test to qualify as an independent contractor. The worker must:

(A) be free from the hirer’s control and direction;

(B) perform work that is outside the usual course of the hiring entity’s business; and

(C) be established in a trade that is the same nature as the work performed for the hiring entity.

Such a test is nearly impossible to satisfy and would make “employee status” the default classification of workers in the state of California.

Consider truckers, which are commonly classified as “owner-operators” or independent contractors. They generally satisfy part A. Many truckers own their truck and determine when and where they work. A significant portion of truckers opposed the legislation and said they valued the flexible hours and freedom they have as independent contractors. But they will be ensnared by the new law because it would be very difficult for many truckers to pass part B, since transportation is the usual course of business of many of the companies that hire them.

Part C would harm countless entrepreneurs who perform contract work to earn supplemental income.  These individuals may operate with complete autonomy but would fail the ABC test because they only have one client and do not market their services to other companies.

Cutting off an avenue to earn a living is bad enough, but perhaps the most pernicious aspect of the AB 5 is that the ABC test is retroactive and exposes businesses to four years of damages for failure to pay overtime and provide meal and rest periods among other items. A company that complied with the law of the land at the time will be on the hook for damages because a completely new standard is being applied to past conduct.

Clearly, before implementation, the state needs to determine the anticipated costs of these damages and the impact it will have on business. Never mind the obvious unfairness of holding a company liable for damages when they were in compliance at the time.

Another issue that legislators must not have thought much about: who will pay for unemployment benefits and workers compensation for independent contractors that become employees based on the new ABC test? Funds have not been collected to payout these benefits. Has California projected how quickly unemployment insurance funds will run out with so many new employees becoming eligible?

Further, during the last recession unemployment skyrocketed, and many individuals avoided financial ruin by taking refuge as independent contractors when they lost their job and could not find traditional employment.

“Between 2010 and 2014, independent contractors grew by 11.1 percent (2.1 million workers) and represented 29.2 percent of all jobs added during that time period,” according to a report by the American Action Forum and Aspen Institute. In next downturn, workers in California will have fewer options to make a living.

Even if AB 5 is well-meaning, many individuals who work as independent contractors think it is a raw deal that may strip them of their livelihood. Legislators in California need to consider their point of views and have a plan to deal with the costs of the law before imposing this unrealistic standard on the fifth largest economy in the world.

Originally published at Los Angeles Daily News.