Business Costs & Regulation

The New Uber Law’s Ripple Effect

Independent contractors across the U.S. could become eligible for employee benefits.

California recently passed Assembly Bill 5, which reclassifies a swath of independent contractors, including gig economy workers, as employees. The landmark legislation could change the employment status of more than 1 million Californians. Opponents say the law could negatively affect a wide range of employers, from small churches to wineries.

We asked Lindsey Cameron, an assistant professor of management at the Wharton School of the University of Pennsylvania, to discuss what this law could mean for employees, employers and consumers.

Why is California’s Assembly Bill 5 so controversial? The status quo is working for a lot of companies. They save money by keeping workers as contractors, and they have the flexibility to hire people when they need them and let them go with no fuss or severance package. Most people rely on their employer for health insurance, so hiring independent contractors lets companies save costs.

How would being treated as an employee benefit independent contractors? Employees get benefits that contractors don’t: a minimum wage, health insurance, sick leave, overtime pay, workers’ comp, unemployment insurance and protection by the Equal Employment Opportunity Commission against discrimination. Employers also contribute to a portion of payroll taxes by putting money into Social Security and Medicare on your behalf. Contractors need to pay the entire payroll tax. This law could also be beneficial to California’s government, which loses an estimated $7 billion a year in unpaid income taxes and more from independent contractors.

Are there disad­vantages for contractors? Some independent contractors—particularly those who are highly skilled and command higher wages—may prefer to not be considered employees. Plus, there are some caveats in the law with creative professionals (for example, writers and artists) and how their intellectual property will be protected if they are considered an employee.

Who will this law affect? The law clarifies who is a contractor and who is not, based on, among other things, whether a worker is engaged in the same business as the hiring entity. It’s known as the “Uber Law,” but it has a much larger effect beyond ride-hailing drivers. The law could affect home health care workers, truckers, interpreters, freelance writers, cleaners and more. Some professions are exempt from this law, including doctors, dentists, psychologists, insurance agents, stockbrokers and lawyers. These categories of contractors work directly with their customers to set the price and are considered higher-paid professionals. Other industries and companies are lobbying for exemptions.

What will happen to the gig economy, which is dominated by companies that depend on independent workers to get the job done? My guess is either prices will go up for consumers or the quality of service will be reduced, because the law raises labor costs. Companies may take on fewer workers because they have to pay them more.

Will other states follow California’s example? The law is set to go into effect in California in January. I don’t see the law in California being enacted in every state, but it could lead some states to adopt similar laws. AB 5 allows a city to file an injunction against a company if it is violating the law, so similar laws may be implemented more at the city level rather than state. Several cities, including New York City, Portland and Seattle, are discussing or have already implemented some worker protections for ride-hailing drivers.

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