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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Consumer Discretionary Stocks to Buy for 2022
stocks to buy

The 12 Best Consumer Discretionary Stocks to Buy for 2022

Consumer discretionary stocks may be among 2022's most challenging places to invest in. But these picks could overcome several sector headwinds.
January 4, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

Most-Overlooked Tax Deductions and Credits for the Self-Employed
Tax Breaks

Most-Overlooked Tax Deductions and Credits for the Self-Employed

If you've recently gone into business for yourself, see how the tax laws can work for you.
December 21, 2021
The Biden Tax Plan: How the Build Back Better Act Could Affect Your Tax Bill
Politics

The Biden Tax Plan: How the Build Back Better Act Could Affect Your Tax Bill

Depending on your income, the Build Back Better Act recently passed by the House could boost or cut your future tax bills.
November 22, 2021
How to Hire People with Disabilities (and Why It’s Smart!)
small business

How to Hire People with Disabilities (and Why It’s Smart!)

America’s post-pandemic recovery offers a unique opportunity for employers to create an inclusive workplace.
November 11, 2021
Can a Divorced Couple Keep a Business Afloat?
small business

Can a Divorced Couple Keep a Business Afloat?

Ending your marriage usually means ending your relationship with your spouse. But what if you’re still business partners? Here’s what you need to know…
November 9, 2021