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What Did California Just Do to the Gig Economy?
A new law could mean companies like Lyft and Uber have to change their business models
Late Tuesday evening, the California state legislature approved a bill that would make it more difficult to classify workers as independent contractors. Its passage followed a long negotiation with on-demand app makers like Lyft, Uber, and Doordash, who have said that classifying their on-the-ground workers as employees would fundamentally change their business models. Uber and Lyft sought an amendment to the bill that would essentially exempt them from the law — they didn’t get one.
California governor Gavin Newsom has already pledged his support for AB 5 in a Sacramento Bee op-ed, and is expected to sign it into law. Here’s what you need to know.
Why is this even important?
United States law classifies almost all workers into two main buckets: employees and independent contractors. If you get placed in the first bucket, you’re protected by labor laws that guarantee you a minimum wage, overtime, and some benefits, like workers compensation and unemployment insurance. If you get placed in the second bucket, you don’t.
All of the tax and benefit obligations associated with hiring workers as employees make it a lot less expensive — about 20% to 30% less expensive — to hire independent contractors. That’s a big incentive to classify workers as independent contractors. Some companies try to cheat and say workers they’re depending on as employees are actually just freelancers. When that happens, unless those companies are successfully challenged, their workers lose the benefits and protections to which they’re legally entitled.
Whether Lyft, Uber, and companies like them are cheating by classifying their workers as independent contractors has been an ongoing debate.
What does the bill actually say?
AB 5 establishes a new standard for determining whether a worker is an independent contractor for the purpose of state laws, which include those governing California’s minimum wage, unemployment insurance, paid sick leave, and paid family leave (it is…
