Governor Newsom signs sweeping independent contractor reclassification bill into law
IRWINDALE - On Wednesday, Governor Gavin Newsom signed AB 5 into law, a major piece of legislation that has massive implications for state employment law. The bill codifies a California Supreme Court decision in the Dynamex case, which threw out established state law that allowed workers to operate as independent contractors which did not provide the same rights and benefits as full employees but gave them greater scheduling flexibility and less operational oversight by employers.
AB 5 had several significant carve outs and exemptions for certain professions, such as physicians, lawyers, and accountants, but much of the news has focused on "gig" workers at Uber and Lyft and the reaction of those companies to this aggressive new regulation by the state of their unique business model. It is estimated that reclassifying all their previously independent contractors as full employees will cost Uber and Lyft $3,625 per driver per year for a combined bill of over $800 million. Uber and Lyft have threatened to place a ballot measure before voters next year to reverse AB 5.
Labor advocates have argued that independent contracting is a legal loophole that allows companies to shortchange workers on the benefits and protections full employees receive at the price of flexibility. What is less discussed in the press is that independent contracting is a long-established form of employment that many, many companies (and many government agencies) rely on to address important needs at an affordable price. In light of this new regulatory bill, companies will face extremely difficult choices of what to do with their previously independent contractors. Certainly some companies will choose to hire some contractors as permanent new employees but given the high price to do so, it is more likely that more will simply discharge the contractors they've relied on. The overall result is that California companies will be shorthanded and hamstrung without access to affordable labor in their own state, putting them at a severe disadvantage compared to their competitors in the rest of the country while California's formerly independent contractors will find themselves without the flexibility and easy-access gig work they once relied on. Lyft has already notified its drivers that they may soon have to work in specific shifts, in specific areas, and only work for a single ride-share platform.
Lawmakers are fond of citing the fact that California is the 5th largest economy in the world, frequently in an attempt to say that the state is doing pretty darn well and therefore it can afford to pay a little extra for more regulation in the labor force. What's often overlooked is that the state - with its immense advantages in agriculture, technology, entertainment, and many other industries - should really be the 2nd largest economy in the world, with a vastly larger economy that delivers more wealth and goods for California's millions of residents. Instead, the state struggles with a crippling housing crisis and vast disparities in poverty and opportunity. Perhaps AB 5 results in some contractors being hired full time and enjoying stronger benefits and protections but more likely is less job opportunities all around, less flexibility, less innovation, and a less dynamic economy in a state that prides itself on being forward thinking.