California has a well-deserved reputation for being unfriendly to business. Depending on what happens in Sacramento this year, the environment for workers could become unpleasant, as well.
An attack on workers’ freedom began nearly a year ago, when the California Supreme Court established a new legal standard for worker classification in its Dynamex ruling. Independent contractors must be considered employees and the companies hiring them must comply with the web of laws and regulations relating to minimum wage, overtime, payroll taxes, unemployment benefits, income tax withholding, and insurance plans.
Freelancers can be classified as independent contractors only when their work structure passes an “ABC test,” which sets an unreasonably high bar. Independent contractors cannot be supervised, they must be engaged in work the “hiring entity” isn’t otherwise involved in, and they must perform similar work for other hiring entities.
While the test has been applied a few times in court, it has not been codified into state law. That could happen during the current legislative session. Whatever Sacramento produces could potentially affect as many as two million contract workers across California. For many, it could mean the difference between being employed and unemployed, as well as the difference between being satisfied and unsatisfied with their jobs.
Support for codifying Dynamex comes from a belief that businesses are actively violating “employee rights” by misclassifying them as independent contractors. At least one lawmaker openly wishes to make things “more difficult” for companies.
“Individuals are not able to make it on three side hustles,” says Assemblywoman Lorena Gonzalez Fletcher, a Democrat in San Diego. “That shouldn’t be the norm. That shouldn’t be accepted.”
If the court’s decision becomes state law, “the norm” will be a reduction in work, disappearing opportunities, fewer dollars earned, and diminished free agency for those who’d rather, and in some cases have no choice but to, work in the gig economy.
While politicians argue without evidence that the gig economy is “rigged,” and want employment affiliations to be dictated by the court’s guidelines, almost all independent contractors prefer the work arrangements they have set up for themselves. The Bureau of Labor Statistics has found that “fewer than one in 10 independent contractors” would choose traditional work environments over freelancing.
Faced with the likelihood of losing their autonomy, independent contractors are already leaving jobs. The entire staff of independent barbers at Bottle & Barlow, a hipster barbershop on R Street in Sacramento, walked out in September when the shop reorganized its business to meet the court’s ABC requirement. Shop owner Anthony Giannotti, who said the Dynamex ruling “really gutted us,” explained why barbers — and other independent contractors — are at a disadvantage under a Dynamex framework.
“Something that attracts most of us to this industry is the freedom,” Giannotti told the local media. “I don’t want to have a boss above me telling me what to do and that’s kinda what the state’s forcing us to do now.”
Tina Kerrigan, a dietary consultant who contracts with Southern California nursing facilities, assisted living homes, and hospices, also sees unwelcome change ahead. She told the San Gabriel Valley Tribune last fall that if she is classified as an employee, she expects to “lose all of my flexibility and I’d see about a 30 percent drop in pay.”
The future of newer, innovative companies, which drive economic growth, would also be bleak. Uber, Lyft, TaskRabbit, DoorDash, Instacart, and other entrepreneurial enterprises that have successfully followed business models requiring contract workers could find their plans might no longer work under a Dynamex regulatory regime. Even if they adapt, they will be forced to shift resources that would otherwise be dedicated to research, development, and consumer demand to compliance exercises.
Transitions will be costly. A UCLA study found that companies retaining independent contractors save “between 29 and 39 cents for every dollar” of earnings they pay out. While some argue that’s a downside of the gig economy, it’s in reality one of its advantages, because it makes companies more profitable, an outcome that should be universally supported. As Austrian economist Ludwig von Mises wrote, “a profitable enterprise tends to expand, an unprofitable one tends to shrink.”
While it’s possible gig economy companies will remain profitable, should the Dynamexdecision become California law, profits will fall, which means expansion will be contracted. Is it that what lawmakers want?
Those hoping to codify Dynamex claim they’re simply trying to protect workers. But they’re more likely serving the interests of unions, which would rather trap workers under their boot than see them employed independently.