California's Gig Economy Bill Will Cost Consumers and the Employees It Was Meant to Help

In September 2019, the State of California signed Assembly Bill (AB) 5, more colloquially known as the Gig Economy Bill, into law. What AB 5 is going to do when it takes effect on January 1, 2020 is that it will severely limit an employer's ability to classify an employee as an independent contractor. While this bill takes particular aim at ridesharing companies (e.g., Uber, Lyft) since they heavily rely on independent contractors, it can apply to any employer unless they can go through the extensive loopholes to get an extension. In order to determine whether an employee is an independent contractor is based on the ABC test:

• A) the worker is free from control and direction in the performance of services; and
• B) the worker is performing work outside the usual course of the business of the hiring company; and 
• C) the worker is customarily engaged in an independently established trade, occupation, or business. 

If the employee meets the criteria of the ABC test, they are considered an independent contractor under California state law. Proponents of the ABC test contend that employees need such protections in the first place because a misclassification means employers do not have to pay such benefits as unemployment insurance, overtime, or minimum wage. Essentially, those who view independent contracting unfavorably see the classification of independent contractor as a loophole to exploit workers (see analysis from Left-leaning Economic Policy Institute here). With AB 5, fewer employees are to be classified as independent contractors, which means greater labor protections. 

The Left-leaning news and opinion site Vox opined in September that the Gig Economy Bill is a victory for workers everywhere. It might seem like that for those on the Left....until irony strikes. In anticipation of the enactment of the Gig Economy Bill, Vox Media, which is Vox's parent company, had to let go of 200 freelance journalists in anticipation of AB 5. This example with Vox Media reminds us of an observable reality when it comes to labor law. Whether we are discussing paid family leave, minimum wage, or menstrual leave, there are tradeoffs to greater employee benefits. When we look at predictive analyses on AB 5, that's exactly what we see. 

Earlier this week, the libertarian Competitive Enterprise Institute (CEI) released its report on the impact of AB 5, specifically with regards to ridesharing. CEI's main takeaway was that AB 5 would result in "greater costs for the platforms, reduced pay for many drivers, reduced flexibility for all drivers, and higher fares for customers – as much as 50 percent higher in some cases." You are welcome to read the report for further analysis here on the impact it would have for health insurance, work hours, employee expenses, paid family leave, and state disability insurance. As an independent contractor, an Uber driver costs an estimated $31,776 annually. CEI calculates that costs would go up to $53,008 annually. If minimum wage is an indication of what happens when labor regulations increase labor costs at this magnitude, we will most likely see a combination of fewer hours for drivers, lower salaries for drivers, fewer choices for customers, and increased costs for customers. 

CEI is not the only think tank to have estimated the costs. The R Street Institute, which is a Right-leaning think tank, preliminarily did so in light of the Dynamex ruling of the California State Supreme Court. R Street estimated that if Dynamex's ABC test were to become law, like it has with AB 5, it would cost the California economy anywhere from $1.3B to $6.5B annually. 

A California-based consulting firm, Beacon Economics, looked at the impact from another angle: effects on employment for Lyft drivers. Depending on the scenario, their study found that it could mean anywhere between 219,547 and 300,673 fewer Lyft drivers in California. For context, there were 323,914 Lyft drivers in California in 2018, which could up to a 92.8 percent reduction in Lyft employment in California. Another interesting find was that flexibility was "very important" or "extremely important" for 95 percent of Lyft drivers, especially since the average Lyft driver in California works about 4 hours a week. 

This analysis brings me to another important feature: why people choose independent contracting in the first place. As R Street points out in their aforementioned analysis, independent contractors have the flexibility to dictate their own work schedules and work for multiple firms. Plus, employers like the arrangement because it entails fewer expenses, less risk, and fewer long-term commitments in a labor market in which employees are staying with their employers for less time than in previous generations. 

Not everyone wants the standard "9 to 5" work arrangement that has become standard in U.S. culture. There are those who would rather have the flexibility over the extra benefits. According to a June 2018 survey from the Department of Labor's Bureau of Labor Statistics (BLS), 79 percent of independent contractors prefer their working arrangement over a traditional employment arrangement. Fewer than ten percent of independent contractors would rather be in a traditional work arrangement. The flexibility also provides a financial benefit. The Right-leaning Heritage Foundation found that worker flexibility generated a worker surplus of 38-51 percent of earnings.

Far from feeling exploited, most independent contractors like the work arrangement they have. When you account for the costs and how independent contractors feel about their work arrangement, it really feels like a solution in search of a problem. We live in the 21st century, a time in which technology is advancing at a rapid pace. We cannot be beholden to working arrangements that worked better "back in the day." We need the flexibility and adaptability of independent contracting to enjoy that growth of on-demand services. Otherwise, states such as California undermine their own progress.