AB-5: What Does This New California Employment Law Mean?

Gig work is a recent term that applies to a one-off work arrangement, generally involving payment of a flat fee rather than a wage. Uber typifies gig work: The driver turns on an app, accepts an assignment, completes the task, and is paid a formula-driven fee by Uber, the broker in the deal.

AB-5 (which stands for Assembly Bill 5) is revolutionary: It forbids most form of gig work, in fact, most forms of independent contracting. My opinion: It goes too far. More on that at the end of the post.

Let’s show what the law means.

We’ll use a person who makes $50,000 a year as a FedEx driver, working 50 hours a week, 2,500 hours a year. That’s $20 an hour. That driver doesn’t keep the full amount: As part of his work, he has to buy or lease a FedEx truck; pay for insurance, gas, tolls, maintenance, a uniform—and he cannot drive a route for anyone else. He nets much less than $20 an hour.

A major court ruling held that FedEx “misclassified” their California driver, and should have treated this worker as an employee.

That follows traditional “wage-and-hour” law. (I’m good with the ruling; it addressed an abuse of independent contracting.) It means that 10 out of those 50 hours of week should be paid at overtime—and the company should pay for its equipment, not the worker.

But here’s how AB-5 broadens that concept. Let’s say Google has a project on artificial intelligence, and wants a worker to sign on for a one-year gig, paid at a fee. Since the worker is involved in the usual course of Google’s business, and since the work is controlled by Google, this worker must now be treated as an employee. I’ve highlighted two key elements of the AB-5 law—course of business and control— to show how the law works.

Okay, that sure looks like short-term employment to me.

But here’s the rub (I’m using an illustration from my employment law class):

As a rule of thumb, work classified as “employment” costs 40% more than the same work classified as “independent contracting.”

Let’s use the $50,000/year figure again. Now Google will pay $70,000 for that work: This includes the employer share of Social Security taxes, unemployment insurance, worker’s compensation insurance, health insurance, paid leave in California (there is more).

In general, this looks good to me— but it’s also true that AB-5 will probably cause some work providers to do less in California. To keep it simple, the AI job might go to Texas, or India—and the worker in my example will not have work.

My friend Lisa points out that the poverty level for a family in California is $84,000 per year—why shouldn’t a worker be classified properly, earn overtime, have some insurance, and have the work organization pay toward Social Security. All good points.

My friend Craig says this is hard on business—and really hard on smaller firms. California is expensive. This will be a job killer. I share this concern.

Okay, is there a better way? Maybe. Two labor economists (both professors) have advanced the idea of “dependent contractor.”

Take the Google story above. They would retain contractor status, but as they worked, Google would be required to pay into Social Security and pay for part of health insurance—but not pay overtime.

In general, I think that’s a useful idea— but it comes from academia, so it is not likely to have much traction in the “real world.”