To say that the gig economy has made an enormous impact on the way we do business in the last few years is, at this point, a little bit of an understatement.
According to one recent study, more than 36% of all workers in the United States are now actively involved in the gig economy in some capacity. Those freelancers contributed more than $1.28 trillion to the economy in 2018 alone, and their numbers are predicted to rise to about 50% of the U.S. workforce by as soon as 2027.
At the same time, this new independent contractor-fueled world we're living in does come with its fair share of controversy. More and more, some businesses are rushing to classify as many as possible of their workers as freelance contractors — even those with job descriptions that more closely resemble that of the company's full-time employees. The difference is that with the latter, employers would have to pay things like benefits, while with the former, they wouldn't.
In an effort to crack down on this type of activity, a new piece of legislation was revealed in California called Assembly Bill 5. Set to go into effect on January 1, 2020, Assembly Bill 5 essentially limits the use of classifying workers as independent contractors by those organizations based in the state. Because of the way the bill is written, however, it effectively reclassifies most independent contractors in California as full-time employees.
That seemingly simple decision brings with it a host of unique implications that are certainly worth a closer look.
The Positives and Negatives of Assembly Bill 5
On the one hand, reclassifying a gig worker as a full-time employee would obviously create a number of benefits for the worker in question. Employees are not only entitled to more labor protections like minimum wage laws, paid sick leave, unemployment and workers' compensation, but they also wouldn't have to worry about the hassle of things like self-employment taxes.
Along the same lines, the bill would absolutely (and, some might say, aggressively) help cut down on the misclassification of employees as independent contractors in the state of California. If an employer wants to be able to classify someone as an independent contractor, the burden of proof is now on them to show it. The state can also sue companies for violating the law, thus giving them more of an incentive to actually follow it moving forward.
The downsides, however, stem from the fact that the bill seems to have been written from the point of view that all gig economy workers are created equal. It's essentially created in a world in which everyone works for a business that functions exactly like Uber or Lyft, and that isn't always the case.
Take journalists, for example. Under the current version of the law, publishers can hire a journalist for up to 35 separate "content submissions" per year and still allow that person to retain their freelance status. This extends to writers, editors, photographers, editorial cartoonists and more. After that 35 submission mark is hit, the publisher must either stop using the services of that person or transition them to employee status.
Those against the bill argue that in an environment like a newsroom, it's easy to get over 35 bylines in less than a month. What happens to the journalist at that point? Are they no longer allowed to work for that outlet until the new year? Are they destined to lose yet another working opportunity on a monthly basis? How long before they run out of opportunities altogether?
Other business owners who oppose the bill — not just major names like Uber and Lyft — say that it will quickly increase labor costs by up to 30% in many cases. Not only that, but they also argue that this new financial burden will have to be made up somewhere, likely leading to increased costs for goods and services to consumers.
People who oppose the bill also argue that this will lead to a reduced quality of service and a reduction in the flexibility that workers in the state commonly enjoy.
The ultimate takeaway from all of this is that while Assembly Bill 5 is a step in the right direction in terms of solving a problem, many are arguing that its current form does little to actually accomplish what it sets out to do and may, ultimately, end up doing more harm than good.
It should be pointed out that California is not the first state to try to tackle the issue of employers misclassifying their employees as independent contractors — it's simply that Assembly Bill 5 may be the most aggressive example to date. As stated, the bill has already passed, and it's going into effect on January 1 whether people like it or not.
The immediate impact of Assembly Bill 5, therefore, remains to be seen. Will it operate as intended, or are the disadvantages that detractors predict going to come to pass? Only time will tell, but one thing is for sure — this is absolutely something that other states (and their freelance employees) are going to be watching very, very closely moving forward.
Spencer Wilson writes for CountingWorks, an accounting news and advice website. Reach him at [email protected].
About Spencer Wilson, EA
Spencer Wilson Financial Management Services has been a family business for the last 40 years. He specializes in personal and business tax preparation and tax planning, as well as accounting and payroll services. Based in Long Beach, they serve the greater Los Angeles and Orange County areas.
