On April 14, 2020 over 150 economists and political scientists in California published an open letter to California Governor, Gavin Newsom, and the California State Legislature asking them to suspend Assembly Bill 5 (AB5). AB5 is the historic law passed in 2019 which went into effect on 1/1/2020, which states, in essence, that anyone providing services to a company which services are part of that company’s usual course of business, is an employee, not an independent contractor, and entitled to all the rights and benefits of an employee.
We have written multiple blogs, and held numerous webinars on this topic, starting with the Dynamex decision which came down from the California Supreme Court in late April 2018, examining the impact of such an approach to employment. The Dynamex decision was subsequently codified in AB5.
There were many, presumably unintended, consequences of this sweeping law which was passed to protect employees from mistreatment. Many former independent contractors immediately lost many of their clients and the ability to earn a living, since the value they offered to their clients was compromised due to the risk misclassification and potential fines and tax penalties.
A groundswell of opposition formed, even before the global COVID-19 crisis, as workers for whom the law was intended to benefit, found themselves unable to make ends meet. This was due to the fact that the majority of them were providing services falling under the usual course of business umbrella. This legally makes them employees if they were to provide those services, no matter how independent they were otherwise. This article provides insights into California’s November ballot initiatives that collected over 1 million signatures in support of extensive exemptions.
The calls for reversing AB5, pre-March 2020, or for expanding the exceptions under it, did not gain much traction in an environment where unemployment figures were at historic lows. With more job openings than people to fill them, some former independent contractors had the option of (possibly unwillingly), setting aside their small business operations, and taking up employment with the companies clamoring for labor.
Some companies whose use of independent contractors were an integral part of their business model and ability to remain profitable, ignored the rule, and went about setting aside money and hiring lobbyists for a court battle/ballot initiative down the road. Some moved out of state. And some, where feasible, started using independent contractors in states which stayed with the common law determination of employment status.
Now, between one month and the next, and even one week and the next, the employment environment has shifted beyond description and beyond contemplation. Millions of suddenly unemployed workers are available to take on jobs to make ends meet, while employers are down-sizing, and scrambling in their own right, to preserve cash and do everything possible to operate in such a way that they will still be in business once the crisis is over. For the vast majority of employers, hiring at this time is not feasible. And certainly, hiring of employees with the accompanying taxes and benefits associated with employment, is not an option if they are to keep above water.
Ironically, many of the employers with additional need for labor are those in the very industries which AB5 sought to bring to heel, the home delivery models of InstaCart, GrubHub and Doordash, for example. The maintaining of the rigid rules in AB5 puts both workers and employers in the predicament of playing a high-stakes game of Would you Rather… where all options are bad.
To the worker: Would you rather…
- have no work at all, and hope that unemployment benefits and rules which forbid eviction if you don’t pay rent will keep things together in the short-term OR
- have work as an independent contractor, without benefits, in an environment which puts you at higher risk than those sheltering in place of contracting a potentially deadly disease, and where you know that, legally under AB-5, you aren’t an independent contractor.
To the employer: Would you rather…
- take on workers as independent contractors to fill your immediate business needs, so that you are able to continue to operate, and service your clients, without unaffordable overhead, knowing that under AB5 they are counted as employees and you could be faced with fines, penalties, taxes and class action lawsuits down the road OR
- continue to operate using employees, as designated by AB5, and potentially go out of business before the crisis is over.
Finally – this is not an all or nothing scenario. In our most recent blog post by Rob Cruz, the idea, which we’ve been contemplating over the last five years of a third category of workers, the Quasi-IC, who has freedom and flexibility of an IC but with some of the benefits of an employee, appears to us to represent a viable middle ground. This classification exists somewhere between the AB5 rules which tend to quash free enterprise, and the laissez-faire approach to employment where the employer has no responsibility for their workforce and there are no protections for workers of any kind. The CARES Act itself provides protection for those who are independent contractors, not just employees. There is a way to do this without putting unbearable risk on the employees, and unbearable overhead on employers, it just needs to be balanced so that all parties are able to share the burden and share the benefits.
So perhaps, let’s hit the pause on AB5. Allow people to work and to make an income as employees or as independent contractors, with some expectation of health coverage for the risks they’re taking in being out there providing their services. Allow employers to use labor in the way they need to with less fear of lawsuits, fines and back taxes. And get consumers who are safely at home, to stay safely at home, while helping cover the cost of the benefits for the risks being taken by the unsung delivery heroes, and revisit this all once the virus passes.