California Wrecks Its Gig-Economy

Monday, January 6, 2020
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The economic law of unintended consequences should serve as a cautionary note for anyone wishing to enact lofty, far-reaching social legislation. The intended purpose of such legislation is typically laudable: It is often to protect disadvantaged groups unable to fend for themselves against potential exploiters. But such legislation backfires by ignoring its unintended consequences. No legislative initiative in the realm of economic and social relationships can advance the position of a protected class unless it also imposes costs on the groups with which it does business. Stressing the intended consequences ignores the countermeasures to which other groups will resort to minimize the impact of the legislation. In the end, by shrinking the economic pie, both sides are left worse off.

This proposition is particularly relevant in labor contracting, where the language of exploitation is never far from the lips of today’s most aggressive reformers. Exhibit A is the fighting words of Lorena Gonzalez, a progressive democratic assemblywoman from the San Diego area who in September 2019 led the successful drive for the passage of Assembly Bill 5 (AB5). That legislation is now reshaping the California economy for the worse by forcing the reclassification of many independent contractors as employees.

This shift is not without profound consequences, for it now entitles these new employees to receive, as a right, an expansive and expensive set of benefits including worker’s compensation, unemployment insurance, social security, overtime pay, and more. AB5 is meant to undo the current law, which in Gonzalez’s view, fails to afford independent contractors adequate legal protection. Her spokeswoman has explained via email: “The assemblywoman is incredibly angry at an economic system that has caused a permanent underclass in her community of working men and women who are constantly being squeezed by corporate greed.”

That short statement unmasks Gonzalez’s perverse belief that market institutions invariably short change people who work hard to improve their economic well-being. Instead, low-income workers are chained into a permanent underclass by an abstract form of corporate greed. Her colorful language is little more than an updated version of the standard Marxist theory that labor is always exploited by the forces of capital, as the Socialist Worker proclaims, through “the forced appropriation of the unpaid labor of workers.”

On Gonzalez’s Orwellian vision, contracts are nothing more than devices that the overclass uses to suck the life out of its workers, leaving them worse off than they should be, which is why laws like AB5 are treated as a form of deliverance from corporate evil. That view was endorsed by the progressive website Vox, which proudly proclaimed  that under AB5, “Gig workers’ win in California is a victory for workers everywhere.” AB5, the Vox writer argued, offers “basic labor protections” that will allow millions of California workers to join unions—and, further, the legislation will set an inspiring example for the rest of the world.

This hopeful fantasy disappears if the law of unintended consequences holds. The contracts people make in voluntary markets involve all sorts of terms and conditions whose logic may escape critics like Gonzalez and the market participants themselves. But in practice, these arrangements survive year after year for one simple reason: They work to the mutual benefit of both parties. That win/win equilibrium is altered for the worse when the state puts its hands on the scales to favor workers, thereby leading employers to adopt needed countermeasures. In some cases, minor adaptations may work to keep the relationship alive on altered terms. But with AB5, the intervention is so large that employers shut down their ventures entirely, to the clear detriment of both sides.

As of early January 2020, the reportage of AB5 was decidedly less optimistic than it was some months before. One feature of AB5 is that it limits freelance journalists to 35 contributions per year before they are reclassified as protected employees. Unfortunately, many journalists work multiple gigs, which each require the production of a weekly column, easily pushing them over the legislative threshold. The overconfident  Gonzalez claimed that employers would convert these freelance journalists into full-time employees.

It was not to be. Ironically, Vox Media, one of the fiercest proponents of AB5, promptly fired all of its 200 free-lance writers in California who worked for its sports platform, SB Nation, replacing that workforce with about 20 full-time and part-time staffers. Why? Not because California is a beacon for the rest of the world, but because in a federalist system, California freelancers face competition from freelancers from other states who do not bear the costs of the California legislation. Yet Gonzalez remains ever defiant, opining that “these were never good jobs,” even while conceding, "I'm sure some legit freelancers lost substantial income… But Vox is a vulture.” Her misplaced paternalism speaks for itself.

It turns out that exactly this same drama is playing out in occupation after occupation, from exotic dancers to clergy members. Even the New York Times admitted that AB5 “may hurt freelancers.” Try to explain that “may” to the tens of thousands of ostensible beneficiaries of AB5 who prize the flexibility of working as independent contractors in a gig economy, like translator Gloria Rivera and truck driver Miguel Perez. Indeed, he filed a constitutional challenge to AB5, saying that he preferred choosing “when, where and how much I worked” while “still mak[ing] enough money to feed my family.” This challenge joins those already filed by Uber and Lyft, supplementing their political efforts to overturn the legislation. Predictably, Gonzalez denounced these suits: “We do not negotiate on basic labor protections for working people in California because unscrupulous employers file lawsuits that have no ground.”

However, the Assemblywoman forgot to note that many of these suits are filed by aggrieved employees like Rivera and Perez. But just how well will their litigation fare? The conventional academic wisdom on this matter is that since this legislation involves economic issues, the low-level of judicial review associated with the rational basis test will doom these lawsuits to oblivion. After all, it is always possible to point to at least some individuals who will benefit from this comprehensive scheme—most often, the competitors of these low-cost services. A constitutional regime of abject deference to economic regulation favors the illicit gains of some over the larger tangible losses of others.  

Sadly, in this context the defenders of AB5 invoke the same suspicious attitude toward markets that led to the constitutional blessing of the minimum wage and overtime laws, as well as the labor statutes and the antidiscrimination laws in employment. For example, Professor Emeritus William Gould of the Stanford Law School, a former member of the National Labor Relations Board, shares that exact position of deference to legislative mischief when he writes; “The conduct of these plaintiffs was a central concern of the Legislature because of substandard wages and conditions and diminished payments to the public treasury. There is nothing arbitrary or unreasonable about their inclusion.”

But even within the traditional deferential framework, Professor Gould’s paternalistic argument may not carry the day. The number of trades and professions covered by the legislation is legion, and the claim of substandard wages and conditions does not seem to apply to folks like Olson and Perez, who can each explain precisely why they are hurt by the law, both economically and socially.

In constitutional terms, the plaintiffs have argued that the legislation violates the Equal Protection Clause of the Fourteenth Amendment by making arbitrary distinctions between workers whose position are virtually indistinguishable. Ideally, these workers should be able to make the stronger claim that the entire scheme violates the bedrock principle of freedom of contract, which allows individuals to determine their own employment relationships in their own way.  But in modern litigation that might be a bridge too far. The attacks on AB5 take the eminently defensible view that the law’s exemptions cut so deeply and so arbitrarily into so many distinct professions that the equal protection claim is valid. The new generation of Trump judges may find that this legislation crosses the line.

In addition, these freelancers—many of whom work in expressive professions like journalism, translation, and stripping—have a strong First Amendment case for the simple reason that they cannot engage in speech-protected activities without receiving payment for the services that they render. In the tangled law governing campaign finances, the key 1976 decision of Buckley v. Valeo acknowledged that cash payments for speech are constitutionally protected, but then allowed for limits on campaign finance solely because of the appearance or actual risk of corruption. Political corruption is simply not an issue in any of these cases, so the basic constitutional protection of free speech should still control. Freelancers address many of the key political and social issues of our time in the work they do. At the very least, they should be exempted from the provisions of AB5, even if the law’s ugly tentacles will still strangle others.

As a matter of first principle, however, this solution should be regarded as decidedly second-best. The entire structure of private property and freedom of speech works best as a unified whole. It is designed to afford constitutional protection against the likes of legislators like Gonzalez. Her righteous and uninformed indignation should not be permitted to strip thousands of people of their right to earn a living.


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