If California has its way, gig workers will be employees

Employer-ContractorLast week, one day after I posted about the payments aspect of the rapidly growing gig economy, the California State Legislature passed Assembly Bill 5, colloquially known as the “Gig Economy Rights Bill.” The bill will require the likes of UberLyft, and other gig firms to bestow employee status upon gig workers, who are currently treated as independent contractors. Indications are that California Governor Gavin Newsom will sign it into law.

If the idea gains national traction, as trends originating in California have a habit of doing, the gig economy will undergo important, costly changes. Per NPR:

The move is likely to have major ramifications for on-demand delivery and ride-hailing companies such as Uber, DoorDash and Lyft, which classify most of their workers as independent contractors. 

The bill’s fans include no less than Bernie Sanders and Elizabeth Warren. Not surprisingly, labor unions are also on board. Altruism aside, unions surely see in gig workers a large pool of potential members. 

The new law will also have an effect on the payments industry.

Payments are a major feature of gig economy apps. Shifting the burden of payroll accounting and management to gig firms will require overhauling that feature. That’s because contractors receive a fee, not a salary, freeing payers from the morass of calculating and filing income, Social Security (including matching employee contributions), Medicare, and unemployment taxes, and other expenses. As it stands, gig firms need only collect fees, take their cut, and pass on the remainder to workers. At least in California, that’s about to change.

Not to be overlooked is that gig firms needn’t concern themselves with minimum wage laws for independent contractors. Gig firms pay fees, not wages, and there are no minimum fee laws. Don’t like working for what the gig firm pays? No shortage of people will line up to take your place. In that way, some argue, the gig economy exploits a loophole that reintroduces the pre-union, pre-minimum wage era depicted in John Steinbeck’s The Grapes of Wrath. The New York Times commented:

… the bill is as much a starting point as an endgame: It will drive a national debate over how to reshape labor laws fashioned in the industrial era of the 1930s to fit a 21st-century service and knowledge economy … Just as federal labor laws were promulgated to help the country recover from the Depression, the imperative to extend basic guarantees like a minimum wage stems from the staggering income inequality in California, the state with the highest poverty rate in the country.

All of which helps explain why California gig workers tend to be all for the bill. And why, as the Times also observed, “Labor leaders cheered in the balcony and lawmakers embraced on the floor of the California Senate” at the bill’s passage.

Passage of Assembly Bill 5 won’t eliminate costs that gig workers hope to escape.

It will simply remove costs from workers to gig firms. According to the BBC, “Some estimates suggest costs for those firms would increase by 30 percent if they have to treat workers as employees.” And, of course, gig firms will not simply eat the increase. They will pass it on to customers in the form of price increases. 

Assembly Bill 5 has been in the works for some time, and gig firms haven’t been sitting around waiting to be acted upon. In a pre-emptive strike last June, reports CNBC

… the CEO of Uber (UBER), Dara Khosrowshahi, and the cofounders of Lyft (LYFT), Logan Green and John Zimmer, wrote an op-ed in the San Francisco Chronicle arguing that being required to classify drivers as employees instead of independent contractors would “pose a risk to their businesses” and ignored two important points.

“First, most drivers prefer freedom and flexibility to the forced schedules and rigid hourly shifts of traditional employment,” Khosrowshahi wrote. “And second, many drivers are supplementing income from other work.”

And now, CNBC continues, challenges are already in the works:

AB5 has attracted staunch opposition from gig economy companies, as it could upend their traditional business model of hiring inexpensive contractors. In an effort to push back against the bill, Uber and Lyft proposed establishing a $21-an-hour minimum wage for drivers in California. The ride-hailing companies, as well as Doordash, have also pledged $90 million on a ballot initiative for the 2020 election that would exempt them from AB5.

The IRS provides guidelines for distinguishing employees from contractors. They are at best foggy. Criteria include the type and extent of instructions given, evaluation systems, training, financial control, equipment investment, and “… how the worker and business perceive their interaction with one another.” 

So from an IRS standpoint, whether gig workers are employees or contractors falls into a gray area. California seeks to make it black-and-white.

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