California's new employment law has boomeranged and is starting to crush freelancers
- California's new AB 5 employment law takes effect Jan. 1, 2020, and freelancers are already feeling the squeeze with a decline in business and income.
- The law codifies the ABC test — which helps employers determine who should be classified as a freelancer — giving exemptions to some types of freelancers, such as architects, doctors, insurance agents and truck drivers.
- Experts say many other blue states, such as New York and New Jersey, are considering adopting similar laws.
- According to Upwork's 2019 Freelancing in America survey, there is a reported 57 million American freelancers contributing an excess of $1 trillion to the economy each year.
Jeremiah LaBrash, 36, works as a tech programmer for a telecom by day and as a freelance cartoonist for media companies on his time off. Sometimes he brings in half of his annual income from his freelance work.
That changed when Assembly Bill 5 passed in California and Gov. Gavin Newsom signed it into law on Sept. 18. The law requires most companies to reclassify contract, freelance and contingent workers — the backbone of the gig economy —as full-time employees eligible for benefits, a guaranteed $12–$13 state minimum wage and protections under the state's employment law.
LaBrash, based in Los Angeles, suddenly found potential projects drying up when he submitted onboarding paperwork to potential clients and they discovered he lived in California.
"I've had them hire me and then come back and say they're no longer interested," says LaBrash. "All of a sudden, someone I've never talked to says, 'We've decided not to move forward.' I've never had that happen before this year."
LaBrash can't be certain the reason is AB 5, though he believes it is. He has seen a 40% decline in his freelance income since the law passed in September. "My savings are stagnant," says LaBrash. "I really can't look into buying a house. The housing market here is hard already."
Even if employers hire him for freelance work, he is limited to 35 annual submissions per client before they have to put him on payroll, he notes. It's a limit under the law. That's not a large amount for regular contributors to media companies. "You're going to hit your quota and they won't want to hire you," he says.
The ripple effect on the gig economy
LaBrash isn't alone in fearing he'll lose a big part of his income as a freelancer. AB 5 has sent shock waves through the world of companies that employ freelancers and the independent workers whom they rely on since it passed. The law codifies the ABC test — which helps employers determine who should be classified as a freelancer — giving exemptions to some types of freelancers, such as architects, doctors, insurance agents, lawyers, grant writers, real estate agents, tutors, truck drivers and manicurists.
The law, which takes effect Jan.1, 2020, could cost the employers a lot of money. It says the exemptions are retroactive. The California Supreme Court just announced this week it will make a decision on whether the ABC test applies to contractor relationships prior to April 30, 2019, before the California Supreme Court opted to use the ABC test in the court case Dynamex Operations West Inc. v. Superior Court of Los Angeles.
It has many unicorns, including Lyft, DoorDash, Instacart and Uber worried about their business model scrambling to launch a voter initiative to roll back the effects of AB 5. The statewide measure, the Protect App-Based Drivers & Services Act, proposed for a November 2020 ballot, would give ride-share drivers and couriers an earnings guarantee of at least 120% of minimum wage and certain benefits and protections but allow them to remain independent contractors who set their own work hours.
Franchisors are also worried that their franchisees could be reclassified from their traditional designation as independent contractors to employees. The International Franchise Association lobbied to get an exclusion from the law, but it wasn't granted.
"I don't believe legislators realized the impact this had," says Gene Zaino, founder and executive chairman of MBO Partners, which studies the freelance economy and provides back-office services to freelancers. "This was really designed to create a safety net for people that needed it. Legislators didn't realize at the same time, they impacted millions of people in thousands of businesses that are using freelancers, even though that was not their intent. A lot of businesses are paralyzed, in terms of 'everyone needs to be on payroll.'"
As Zaino explains, many freelancers work independently by choice on terms they prefer. Many are concerned that they'll have to trade in their freedom for structure, potentially losing their ability to set their own hours. "There are people that want to be independent contractors," says Zaino. "They want the freedom and the choice and don't want their clients to be afraid to use them."
And California's new regulation is expected to have a ripple effect throughout the nation's $1 trillion gig economy.
Many employers and freelancers are concerned that other blue states, such as New York and New Jersey, will usher in similar laws.
Opposition mounts from many quarters
Ride-sharing platforms have been lobbying against the California law through Protect App-Based Drivers & Services. They are launching a ballot referendum for 2020 to exempt ride-hailing apps from the law but setting minimum pay for drivers, reimbursing them for mileage, offering health-care stipends in some cases and insurance for workplace accidents.
One area of AB 5 that has sparked great concern is that if freelancers fall under the occupations listed in it and they do work for a company that could be viewed as a "core capability" of that company, they must be paid as an employee, according to Zaino.
"If you are doing copywriting work for a company that does blogging or that communicates — which every company does — you should be an employee," says Zaino. "I believe the intent of the law was not to do that."
Legislators didn't seem to understand that companies often hire people from out of state as remote freelancers, putting freelancers in California at a disadvantage, notes Steve King, partner in Emergent Research in Walnut Creek, California, which studies the freelance economy.
"It's hit writers first," says King, pointing to a number of articles that California-based freelance writers have published about the difficulty in getting assignments since AB 5, as well as freelance job postings that now exclude California freelancers.
Professional Independent Consultants of America, which opposes the law, has advised its members to form an LLC or S Corp, get a business license, create a business infrastructure that includes elements such as a separate business bank account, create a website and a business email address at a domain only used for business, advertise, use written contracts and submit invoices for all work, not time sheets, according to Liz Steblay, co-founder. "Effectively, this law means that to be paid as a business, a freelancer or solo professional is going to have to be set up like a business and act like a business," Steblay said in an email.
Other states follow suit
But it's not only freelancers who are worried. Emergent Research recently discussed the law with a California-based corporation that was changing its freelance hiring policies, says King. "They told us they were going to stop hiring California-based independent contractors," he says.
Some industries, such as media and tech, could especially be hard-hit. "There's a lot of nervousness in Hollywood about how this gets interpreted — there are so many freelance creatives," says King. "We won't really know until a few court cases get settled."
Other states, such as New Jersey and Massachusetts, already have strong worker classification laws. New Jersey's laws may be getting stricter. It is considering a similar set of bills, Senate bill S4204 and Assembly bill A5936, which some legal observers say could be the most restrictive in the nation. S4204 says a worker will be assumed to be an employee unless they are free from control and direction in performing their work, the service performed is outside the usual course of business for the company and the worker is "customarily engaged in an independent trade, occupation, profession or business of the same nature as that involved in the work performed." The N.J. assembly bill addresses additional penalties for violation.
Fight for Freelancers, a Facebook group of independent workers, was formed in November to fight the legislation. New Jersey's proposed laws include only a small handful of exempted occupations, compared to the California law. Senate Democrats, in response to complaints that independent workers will have to leave the state in order to work, recently sent a letter to their followers saying they will make changes to the bill to protect independent contractors and freelancers.
King believes there could be changes in the offing, given that California's Gov. Newsom and legislators have said they will amend the law if there are problems.
"It's a first try," says King. "As long as everyone accepts that it needs to be adjusted and fixed, it's a good first try."
Legislators need to modify the law so it takes into account the many different situations of freelancers, says Zaino. The situation of an Uber driver who is randomly hired when a consumer summons a car on the app is different from that of a freelance professional whom a company interviews and hires for a specific project because of his or her unique skills, he points out.
"We need to make it clear to policymakers that you can't have one-size-fits-all," says Zaino. "You can't take a broad brush approach on this."
Not all freelancers are being affected. At 99Designs, a global platform for hiring freelance graphic designers based in Australia, CEO Patrick Llewellyn does not believe California AB 5 will affect many of this platform's freelancers, who tend to be knowledge workers located outside of the major cities. "From everything I've looked at, it doesn't meet the requirements of what we do," says Llewellyn.
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