AB5 Gig Economy Law Threatens California’s Coronavirus Response, Economic Recovery

Gloria Rivera is among California’s front-line health care workers unable to find work in hospitals — even amid the coronavirus pandemic — due to AB5, a controversial new labor law targeting the gig economy. 




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The native Spanish speaker is a medical interpreter who has taught at major universities and collaborated on top-level projects with the Centers for Disease Control and Prevention. But as an independent contractor in the San Francisco Bay Area, she has been almost completely shut out of work.

“Right now I have zero requests,” Rivera stated. “Just having AB5 was bad. But coronavirus has made it even worse for most of us.”

California Assembly Bill 5, which went into effect at the start of this year, mandates that companies reclassify many independent contractors as full-time employees eligible for health benefits, minimum wage guarantees, workers’ compensation and a slew of other labor protections. Employers and freelancers say those added costs and the law’s compliance nightmare caused work to dry up. On top of that, the economic crash from the coronavirus has made clients even scarcer.

Gig economy companies like Uber (UBER) and Lyft (LYFT) were the intended targets of the sweeping legislation. But the law expanded in its final version. So freelance journalists, truckers, speech therapists, mall Santas, indie filmmakers, court reporters — and even exotic dancers — became unintended victims.

Now AB5 is hindering the state’s response to the coronavirus crisis, revealing how it could slow the eventual economic recovery.

California could be a preview of what’s to come elsewhere. New York, Illinois, Massachusetts and Washington are considering similar laws. New Jersey plans to revisit its gig economy bill.

At the national level, the House passed a pro-union bill that would also feature changes to how employers classify workers. Presumptive Democratic presidential nominee Joe Biden has tweeted his support for AB5.


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‘Gig Economy’ Medical Workers?

AB5 grants exemptions to certain groups like doctors. But other critical health care workers like nurse practitioners, respiratory therapists and anesthesiologists aren’t exempt.

In certain cases, hospitals and clinics hire these types of workers on a contract basis when there is higher demand. It’s not always financially feasible for health centers, especially those in rural areas, to bring in nurses or interpreters full-time when they’re only needed several times a year.

The state chapter of the American Nurses Association, which supported AB5, launched an online petition asking Gov. Gavin Newsom to suspend the law. The professional group said it “hurts our nursing workforce in the Covid-19 pandemic when the need for help is dire.”

The American Nurses Association, which supported AB5, now wants to suspend the law. (Spotmatik Ltd/Shutterstock.com)

Rivera, a former medical doctor, was lucky enough to find part-time interpreting work at Stanford before the coronavirus shutdowns began. But her former clients are hesitant to work with California-based interpreters because the risk of state fines for noncompliance. Violators face civil penalties of $5,000 to $25,000 for each infraction and criminal liability.

Rivera thinks the law had good intentions to protect mistreated workers. But she says its broad scope illustrates a fundamental misunderstanding of independent contractors.

“Translators and interpreters are highly trained professionals,” she said. Under AB5, she says she is categorized “the same as a gig worker.” 

Rivera prefers the flexibility to set her own schedule. And she notes that contractors with specialized skills often make more money serving multiple clients than working for one employer full-time.


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Business As Usual For Delivery Services

Medical staffers aren’t the only front-line workers affected by the gig economy law. Delivery services account for a large number of independent contractors. In fact, ride-hailing and delivery platforms have over half a million drivers in the Golden State. DoorDash, Postmates and Uber Eats earn the biggest percentage of their sales in California and would be the delivery services most affected by AB5, according to research firm Second Measure.

Postmates delivery bicycle
DoorDash, Postmates and Uber Eats earn the biggest percentage of their sales in California. (robert cicchetti/Shutterstock)

Rideshare and delivery companies initially refused to reclassify their drivers as full-time employees. But some have begun to modify their platforms and offer benefits like paid sick leave to comply with AB5.

Still, many are continuing business as usual, keeping drivers as independent contractors and hoping legal challenges will provide them with a reprieve from the courts.

Meanwhile, these delivery services provide a lifeline to many homebound people and small businesses trying to survive government-mandated shutdowns. They also offer economic opportunity.

“We’re seeing a huge surge in job postings for delivery drivers and for shoppers particularly,” stated Julia Pollak, labor economist for ZipRecruiter. “Many of these jobs involve immediate start dates and an expedited hiring process.” 


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Alfred Porche, who started driving for Uber and Lyft in 2016, fears AB5 will imperil the business model of delivery services that consumers depend upon.

He likes the flexibility and the freedom as an independent contractor. “You have the choice to choose if you want to drive or not.”

When the coronavirus forced people to shelter in place, Porche shifted from driving people to delivering meals and groceries on Instacart, whose partners include Costco (COST) and CVS Health (CVS). Now on a typical day, he logs hundreds of miles crisscrossing Southern California to make deliveries. 

“There are people who cannot get to the grocery store,” he told IBD. “We’ve been moving product, moving supplies and necessities for families. Gig workers have been making things work.”


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Where The Rubber Hits The Road On AB5

For now, Porche’s fears have not come to pass. Lyft has yet to implement any changes to its platform. Uber has made small adjustments to its app aimed at price transparency to thwart the reach of the new law.

Uber earnings
Uber has made small adjustments to its app aimed at price transparency. (Mr.Whiskey/Shutterstock.com)

The companies appear to be waiting it out, as they sponsor a ballot measure to undo the law. Uber CEO Dara Khosrowshahi said on the company’s Q4 earnings call that AB5 implementation is still in the early phase and “hopefully, we can get to a win-win situation.”

So far, not much has changed operationally for Uber and Lyft, Wedbush analyst Daniel Ives told IBD. But he warned that driver labor costs could jump as much as 30% for the two ride-hailing behemoths, which are already struggling to attain profitability.

The broader worry of investors, he added, is that legislation like AB5 will be exported to other states. New York, for example, is one of the strongest-performing metro regions for Uber and Lyft sales. 

“It’s not just about California,” Ives said. “It’s about setting a precedent where you could see this happen in other cities and potentially other countries.”


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‘Irrational And Arbitrary’

Adding to the confusion is AB5’s uneven effects. While doctors, dentists, insurance agents, manicurists and lawyers got exemptions, other professionals did not. For the state’s 1.5 million freelancers, those carve-outs illustrate the law’s “irrational and arbitrary” nature, according to a lawsuit filed by journalist and photographer groups in December.

Freelance journalists, editors and photographers are currently capped at 35 annual “content submissions” per client. Many businesses have reacted to the new regulations by shifting jobs to workers in other states. Some have dropped their California contractors entirely.

In a high-profile twist of irony, Vox Media — which backed the law — cut ties with about 200 California-based writers immediately after the bill was passed to avoid compliance issues.

“Stories from various professions are pouring in daily,” stated Karen Anderson, a freelance writer and administrator of the Facebook group Freelancers Against AB5.

The forum, which has grown to over 17,000 members, includes daily posts from people who report canceled contracts and out-of-state clients refusing to work with them because of the uncertainty over the onerous regulations. 


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The ‘Double Whammy’ Of AB5, Coronavirus

The coronavirus pandemic has only exacerbated the harmful effects of AB5 on California’s independent contractors. Work is even harder to find with the economy in a sharp recession.

“A lot of members of our group lost all their income back in January,” Anderson said. “They were already hanging on by a thread. And now the pandemic itself is just a double whammy.”

Even seeking unemployment aid poses another risk.

The state’s independent contractors are now eligible to receive jobless benefits thanks to a change in California policy in response to the pandemic. But AB5 has made freelancers reluctant to apply for the aid for fear it would make them and their clients targets of state auditors. 

That’s because the state requires independent contractors to disclose past employers and clients to determine if they have been previously classified as contractors instead of full-time employees. 

“It feels like a trap,” Anderson said, noting that small-business owners began to receive audit notices in the mail as coronavirus shutdown orders took effect. 


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Ballot Measure Takes AB5 Challenge To Voters

Companies like Uber, Instacart and Postmates have tried and failed to challenge the law in the courts. Trade groups representing truckers and freelance journalists have also filed legal challenges.

Meanwhile, Uber and Lyft plan to spend nearly $110 million on a November ballot measure to overturn the gig economy legislation. 

gig economy company Lyft
Uber and Lyft plan to spend nearly $110 million on a ballot measure to overturn AB5. (Tero Vesalainen/Shutterstock.com)

The initiative, known as the Protect App-Based Driver and Services Act, would protect the right of app-based drivers and couriers to work as independent contractors. It would also require ride-share and delivery companies to offer new benefits. This includes guaranteed pay equal to 120% of the minimum wage and health care contributions. 

The choice for individuals to access earning opportunities on ride-share and delivery apps is needed now more than ever in the coronavirus economy, said Stacey Wells, a spokeswoman for the initiative.

“The whole crux of this is that flexibility to float from app to app to work when you need to,” she said. “That’s what the ballot measure endeavors to protect so that people who were using this as a source of additional income or flexible income don’t have that upended by politicians.”


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Outlook For Post-Covid Recovery Under AB5

But grassroots advocates like Anderson argue against more measures that only apply to specific industries. She’s concerned the law will become rife with carve-outs for companies and professions that can afford expensive lobbying efforts.

“It’s like the Titanic sinking,” she said. “The people that are swimming for the lifeboats — which are the exemptions— those are the strongest ones. Everybody else is drowning in the water.” 

So far, at least 34 separate bills related to AB5 have been introduced in the state legislature. These amendments would only expand the list of professions that are exempt from the gig economy law. A measure that would have fully repealed the legislation failed in the Assembly. 

In February, AB5 sponsor Assemblywoman Lorena Gonzalez announced she would introduce amendments that would remove certain restrictions on freelance journalists and photographers. But that relief might be too late for many of California’s independent contractors who are suffering from lost income opportunities. 

Anderson fears AB5 will only hamper California’s economic recovery once stay-at-home restrictions are lifted. 

“We need working people,” Anderson stated. “When you have all these roadblocks and restrictions on the back of every single entrepreneur and independent small business in the state of California, how is our recovery going to work? It’s going to be pretty grim.”

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