Gig economy is facing its own legal revolution.

California's AB-5 bill is looking to change the entire landscape of the Gig Economy and it's important that people understand the bill as well as its lasting effects. To get filled in, check out our article here.

Why California's New AB-5 Bill Will Change the Gig Economy Forever

No one is going to argue the prominence of Uber and Lyft, these platforms have not only revolutionized how people travel but also how people work.

For the most part, people typically made their living by working a 9 to 5 or through a number of part-time jobs in order to get by. But there has been a rising number of people choosing to work how they want, when they want. That’s because ride-sharing apps like Uber and Lyft give drivers the flexibility to choose their hours as well as their location.

For example, if you’re a college student that just needs to drive for Uber on the weekends in order to buy groceries, you have the freedom to do so without asking a boss for permission.

In the same vein, if you’re driving for Lyft full-time and need to be on the road six days a week in order to get by, you can do just that without begging for extra shifts.

This level of freedom given to drivers has helped give rise to the Gig Economy, which describes a free-market type of system where employees work temporary or contract roles for a short period of time. And while the Gig Economy has given an unprecedented level of freedom to employees, it has led to a number of issues that stem from the legal status of these employees. These issues eventually led to the rise of California’s AB-5 bill.

What is the AB-5 bill?

California’s AB-5 bill works to flip the classification of many workers from independent contractors to employees. This change of classification works to give employees a greater range of labor protections under sick leave, minimum wage laws, and more. For example, drivers for Uber and Lyft will now be considered employees rather than independent contractors.

The bill was approved in September 2019 and will come into effect in January 2020.

The expected ramifications of the bill

While some may look at the bill and breathe a sigh of relief that it’s only in California, the reality is that the state is typically the first to pass these types of labor laws. Which leads to believe that other cities and states can expect to see similar legislation within the coming years.

A perfect example of this can be seen in Predictive Scheduling and Fair Workweek laws. San Francisco was the first to adopt these laws in 2014 and now a number of cities/states around the country now have their own set of Predictive Scheduling laws.

That said, it’s important for business owners to understand the difference between independent contractors and employees so they aren’t met with any surprises should a law similar to AB-5 pop up in their area.

Employees vs independent contractors, how to tell the difference?

The reason AB-5 is getting so much attention is because company’s will be expected to change the classification of certain independent contractors to employees. Thus having to pay for certain benefits they previously didn’t have to.

If you’re wondering whether or not certain staff members would be considered employees, take a look below for a better idea of who’s considered an employee or independent contractor.

An employee is either paid by the hour, through commission, or paid a salary. They’re taxed on their income and employers must withhold federal, state income, as well as FICA taxes from the amount they’re paid.

On the other hand, an employer with an independent contractor doesn’t have to withhold state, federal, or FICA taxes from the amount they’re paid. An independent contractor is solely responsible for paying all of their self-employment taxes and other taxes based on their earnings.

Not all workers are on-board

At first glance, people may look at the bill and assume that each and every independent contractor will be jumping at the opportunity to become an employee. After all, why would anyone be against receiving labor protections that could help them out in a bind?

Well the truth is that a number of independent contractors are against the AB-5 bill. Particularly a handful of Uber and Lyft drivers that worry about possibly losing out on the work flexibility that they value so much.

The same flexibility that helped give birth to the Gig Economy in the first place.

That’s because these drivers worry that once they’re considered employees instead of independent contractors, they’ll see some of their freedoms disappear.

And their assumptions wouldn’t be terribly incorrect either. When New York City passed a number of pay rules in an effort to raise wages for ride-sharing drivers, the drivers found that making more money came at the cost of choosing how they wanted to work.

For example, Lyft made it so drivers couldn’t log in to work in areas that weren’t as busy. In fact, drivers are now required to either wait for ride requests or to make the drive to a busier location like Brooklyn or Manhattan.

Why would they do this? Because Lyft doesn’t want to pay the full minimum wage for drivers who aren’t in an area where they’ll get as many rides.

And while Uber and Lyft haven’t announced anything yet that would make people believe that a similar rule will be enforced in California, it’s not crazy to believe that independent contractors in the state will lose out on some of the freedom that made the Gig Economy so attractive in the first place.

The Gig Economy

In order to fully understand the exact effects this bill will have on the Gig Economy, it’s important to first garner a strong understanding of what exactly the Gig Economy is.

The Gig Economy isn’t a fancy term for service workers, drivers for ride-sharing apps, or for people who prefer to work part-time jobs in lieu of a full-time role.

The Gig Economy is best described as a labor market made up of workers choosing to go with short-term contracts or freelance work instead of a traditional 9 to 5 job.

“Why would anyone choose short-term contracts over a steady job?” There are many answers to this question and it’s worth the time to properly understand each and every aspect. But for better insight, check out the two points below:

1. More Flexibility

When you’re working a steady full-time job, you’re generally unavailable between the hours of 9 am to 5 pm or whichever hours you do work. So if you need to run an important errand, your only choice is to get the task done before, after work, or on an off day.

While most people have been conditioned to believe that this is just how the world works, the reality is that Gig Economy workers have found a loophole in the system.

If you’re a freelancer that gets by on short-term contracts, you’re generally free to pick the hours that you work. So if there’s an important appointment you have to make or if you just like to sleep in until noon, you have the freedom to pick and choose exactly the times that you work.

This freedom is precisely why so many people choose to drive for Uber or Lyft, the platform gives them the freedom to work when and where they want. Providing a level of freedom that leads many to ditch the idea of a full-time job altogether.

2. Greater control over income

While it may seem counterintuitive to pass up a full-time job because you want to make more money, the reality is that Gig workers want the freedom to put in as many (or as little) hours as they’d like. Thus equaling greater take-home pay at the end of their workday.

For example, a full-time salaried worker will receive the same amount of pay regardless of the number of hours they put in. The only way for them to raise their income is by receiving a promotion or getting a new job.

In the same vein, an hourly worker at a seafood restaurant has no control over the number of hours or shifts they receive each week. So if they need to work 50 hours next week but their boss is only giving them 35, then they have no choice but to either deal with it or find a new job.

Whereas, an Uber driver is free to work as many hours as they’d like. If they want to work 12 hours a day, 7 days a week while sleeping in their cars, they have the freedom to do so. Thus giving them greater control over their income potential.

Effects on the Gig Economy

Knowing the above information, it’s easier to understand why many Gig Workers are starting to worry about the ramifications of the AB-5 bill. If this bill creates a wave of similar bills that end up in every state across the country, then Gig Workers may see their entire way of making a living change overnight.

That’s because if companies are forced to treat independent contractors like they’re employees, then they’ll be responsible for investing more into them and providing benefits they previously didn’t have to.

While this may seem nice on the surface level, the reality is that employers are going to expect more from employees if they’re expected to pay for benefits that they previously didn’t have to.

It’s not crazy to believe that Uber and Lyft will now be strict on where and when their drivers are allowed to work. Similar to the previously stated case in New York, these platforms can just as easily say that drivers must now stay out of a particular area or skip out on working during slow times.

Take this scenario, Uber digs through their data and finds that they’re losing money by having drivers out on the road between the hours of 2 am - 5 am. As a result, they no longer allow drivers to work those hours.

Another example is if Lyft finds that the Bayview neighborhood in San Francisco doesn’t generate enough money to justify having drivers out there. So as a result, they no longer let drivers sign into the app when they’re in that neighborhood.

Now imagine a driver named Rudy who lives in Bayview and prefers to work late at night / early in the morning, typically between the hours of 1 am - 7 am. While he used to be able to drive in Bayview with no problems and work the hours that he prefers, he now must adjust his work habits and drive to another neighborhood while working at different hours because Uber deemed his previous habits to be inefficient.

So is AB-5 good or bad for workers?

At the end of the day, it’s hard to really come to a conclusion regarding whether or not AB-5 is to the benefit of workers or not. That’s because each worker is an individual and values different things in their professional lives.

For some workers, AB-5 will be considered a godsend. And for good reason, it gives them a level of protection that they’ve never experienced before. If they had a particularly bad week where they weren’t able to get that much business, they can sit comfortably knowing that they’ll at least receive minimum wage.

And if a worker is sick to the point where they can’t leave the bed, they can rest comfortably knowing that AB-5 has afforded them the benefits of sick leave.

On the other side, a number of workers are scared to see the flexibility they treasured go away. The ability to work when you want, how you want is hard to find in the service industry and AB-5 may see these freedoms coming to an end.

Last thoughts

The Gig Economy has provided a level of freedom to workers that has revolutionized the way people work. No longer are workers subjected to a manager telling them when and where they can put in their hours.

And while AB-5 hasn’t said anything about limiting the levels of freedom afforded to Gig Economy workers, it's possible that the legislation will cause shockwaves throughout the country that may put a damper on the Gig Economy all together.

Either way, AB-5 has been passed and it’s best for both workers and their employers to best understand how the bill will affect their operations.