The Worst California Law Of 2019—Eliminating Millions Of Independent Contractors

Tuesday, December 17, 2019

2019 saw much new California legislation that will depress economic opportunities and raise the state’s already high cost of living. Despite many candidate bills for worst of the year, it is easy to pick the winner (loser): Assembly Bill 5, which raises government intrusion in private labor relationships to an unprecedented and dangerous level.

My criteria for picking the worst law are (1) expected economic damage from the law, (2) infringement on personal choice and freedom, (3) blatant political payoffs to important constituents, and (4) totally specious economic justification of the law from lawmakers. Assembly Bill 5 hits the motherlode on all four criteria.  

It is hard to imagine a worse law, which potentially affects as many as 2 million California workers who choose to work as independent contractors.

The new law effectively eliminates independent contractor designations for all but a few protected occupations, including barbers, doctors, dentists, real estate agents, architects, and engineers, several of which have politically influential representation in Sacramento.

By forcing an inefficient, one-size-fits-all employee-employer relationship on these 2 million partnerships—whose parties typically prefer their current terms—costs will rise, and at least some of these relationships will no longer be economically viable and will be terminated. This would mean the destruction of 100,000 work relationships even if only 5 percent are destroyed.

And this will be a forced arrangement on nearly all independent contractors. A Bureau of Labor Statistics survey found that nearly 80 percent of independent contractors preferred this situation to that of being a formal payroll employee.

This is a huge restriction on individual choice and on the opportunity to engage in mutually beneficial trade. Step back for a moment and consider what state lawmakers have done and how much they are infringing on people’s rights.

Even though the law does not take effect until January 1, it is already negatively impacting California freelancers, who are losing work to workers in other states that do not have this restriction. One freelancer reports that his income has declined by 40 percent since the law was passed just three months ago.  State lawmakers certainly did not intend for California workers to lose their incomes, but this is exactly what happens when poorly designed economic policies are adopted. And this happens time and again in California.

So why would government intrude on these consensual business relationships that both parties prefer? There must be a very good reason, yes? No. The reason is that politics that is papered over with really bad economics. Politically, unions have the most to gain from this law, as it provides them with many new workers to potentially organize into collective-bargaining agreements. The law received strong support from the California Federation of Labor, Teamsters, Service International Employees Union, and other organized labor groups.

State lawmakers have tried to hide this gift to unions by claiming that the new law will give labor important new rights and raise compensation. But their argument is completely backwards. You don’t increase someone’s rights by taking away their existing rights. And there is no economic sense that government can improve employment relationships for these workers. If these workers preferred working as a formal employee, with much less independence, then they could have negotiated that with the hiring entity.  

There is no question that this law is a big political payoff to organized labor, with more goodies to come. California governor Gavin Newsom wrote, “This Labor Day, I am proud to be supporting Assembly Bill 5. While this step is important, we must do more to reverse the 40-year trends that have hollowed out our middle class and driven income inequality. We can do this by partnering with labor and supporting their efforts to … speak with one voice. Across the country, unions are paving the path for new ways to organize.”

Newsom has eliminated any pretense of supporting unions at the expense of workers, but do workers even want unionization? Here, the answer is clearly no. Less than 6 percent of the private-sector workforce is unionized today. Union efforts at organizing nonunionized firms, including those in industries previously organized, such as auto manufacturing, are failing. 

Workers are smart, and they understand that in an increasingly competitive, global marketplace unions are not what they want. The idea that compensation will increase if these contractors become organized employees is nonsense. Hiring these contractors as employees will increase the hiring party’s costs, because employment costs, net of compensation, are so much higher than when hiring an independent contractor. These costs of managing a formal employee include human resource management, compliance, reporting, and litigation. As employment costs rise, prices rise, sales drop, and employment drops. But state lawmakers do not consider these consequences of their actions.

Moreover, the idea that gig companies such as Uber, Lyft, DoorDash, and others are raking in money hand over fist and can easily pay more to their independent contractors is incredibly dangerous thinking by politicians. Not one of these companies has yet turned a profit, and by competing vigorously with each other for gig workers, there is little room to pay more.

From society’s perspective, we want these gig companies, which have developed remarkable new technologies, to do what they do best, which is innovate and create. It is completely wrongheaded to force Uber and Lyft to become taxi vendors and have them use resources for scheduling and dispatch and trying to figure out who is going to drive the graveyard shift.

Ironically, by making labor more expensive, AB 5 will incentivize gig companies to focus their innovative efforts on substituting capital for labor, which means driverless vehicles. AB 5 will do more than virtually anything else to accelerate driverless ridesharing.  

Other states, including New Jersey, are following suit. The New Jersey state government recently fined Uber $649 million for “misclassifying” their drivers as independent contractors and failing to pay unemployment taxes.. Of course, the problem with New Jersey’s argument is that there is no unemployment among gig workers. They don’t need unemployment benefits.

These laws are really nothing more than money grabs for state and local governments and politically important constituents, and should be recognized as such.  

With laws like this, it is no wonder that the California economy is entering a recession. And if you have a better “worst law of 2019,” please write to me and let me know. I don’t think that AB 5 can be topped, but you never know. This is California.