Published
February 16, 2024
How bad is California’s notorious law making it nearly impossible to use independent contractors? A new study from the Mercatus Center at George Mason University has determined that California’s law, called AB-5, will result in a decrease in self-employment, a decrease in overall employment, and no increase in new employees.
In other words, no independent contractors will be converted to employees, which was the whole point of the law. Instead, they will lose work opportunities. Unfortunately, the U.S. Department of Labor (DOL) has gone down this same road with its new independent contractor rule.
To refresh, the California legislature enacted AB-5 in 2019 to codify a 2018 decision of the state Supreme Court called Dynamex. That decision imported a strict “ABC” test into California from Massachusetts.
The strict ABC test says that in order for a worker to be classified as an independent contractor, the worker must satisfy all three prongs of the test: A. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and, in fact, B. The person performs work that is outside the usual course of the hiring entity’s business; C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB-5 applies the ABC test to multiple areas of California law, such as the Labor Code, unemployment insurance, and wage orders. However, the sweeping nature of the law forced lawmakers to include exemptions for 57 industries and occupations, such as doctors, lawyers, and architects. After it was passed, the outcry from other sectors that would be affected was so strong that the legislature had to pass another bill to exempt 52 more occupations, including musicians, writers, and editors. After a November 2020 ballot initiative, internet platform-based transportation and delivery workers were exempted from AB-5.
Nonetheless, even with all of these exemptions and carve-outs, the impacts of AB-5 have still been significant, according to the Mercatus report: “Overall, we find that worker reclassification reduced the level of overall employment by 4.4 percent and that this association is statistically significant. … Among self-employed workers, however, we find that worker reclassification reduced the level of employment by 10 percent and that this effect is statistically significant. … Overall, we find no evidence that AB-5 increased traditional employment (whether full-time or part-time) as intended."
To sum it up, overall employment fell. Self-employment fell even more. Independent workers were not reclassified as employees. They just lost their jobs.
The theory behind both AB-5 and the DOL’s recently finalized regulation for classifying independent contractors or employees under the Fair Labor Standards Act is the same: by making it harder to maintain independent contractor relationships, independent contractors will be converted into traditional employees. The Mercatus study suggests this theory has failed in California. The question is whether DOL has learned anything from that example.
About the authors
Marc Freedman
Marc Freedman is vice president of workplace policy at the U.S. Chamber of Commerce. He develops and advocates the Chamber’s response to OSHA matters; FLSA issues such as overtime, minimum wage, and independent contractors; paid leave issues; EEOC, and other labor and workplace issues.
