How California’s AB5 Law Threatens Entrepreneurship

From Uber drivers to freelance writers, AB5 will upend countless lives

California’s “AB5” nightmare is only getting scarier.

San Francisco District Attorney Chesa Boudin recently announced a civil lawsuit against the food delivery platform DoorDash, accusing the company of misclassifying its delivery workers as independent contractors instead of employees.

The complaint, which alleges “unlawful and unfair business practices,” aims to reclassify “gig” workers as employees and force their “employers” to pay local, state, and federal taxes in accordance with that new classification.

Why all the hubbub now? It has to do with California Assembly Bill 5 (AB5), signed into law by Gov. Gavin Newsom (D-CA) last year.

AB5 requires companies that rely on gig workers to use a three-pronged test in determining whether to classify those workers as employees or independent contractors. This test essentially assumes that gig workers are employees, with few exceptions.

Who stands to benefit? Union officials.

Because labor unions cannot directly organize independent contractors, union leadership tends to support laws like AB5 as organizational tools. Classifying those contractors as employees can create another potential source of income for labor unions in need of dues revenue. As Ruwan Subasinghe, legal director for the International Transport Workers’ Federation, put it, “We want an international governance framework for gig-economy workers that can help put an end to the scourge of misclassification.”

(One prominent union ally is San Francisco DA Chesa Boudin, who is suing DoorDash for misclassifying its workers. Another is Gov. Newsom, who signed AB5 into law.)

The only issue is that reclassifications threaten the longstanding work arrangement between technology companies like DoorDash and the workers on whom they rely. This work arrangement—in place for over a decade—provides hundreds of thousands of California’s workers with financial security once thought impossible. Tech companies have provided those workers with an opportunity to be entrepreneurs who control their own destinies, in return for serving their customers.

More than one million Californians use ride-share or delivery apps to make additional income. This revenue stream can fill a wide range of personal needs—from covering weekly groceries to paying off a mortgage or monthly rent.

But that revenue is now at risk. According to the California-based Berkeley Research Group, AB5 may “result in eliminating 900,000 ride-share and delivery jobs.” This would reduce the number of drivers needed in California by as much as 90 percent.

As is generally the case with legislative overreach, the unintended consequences are multifaceted. AB5 not only threatens California’s drivers but all freelancers working non-traditional jobs. This includes freelance writers, editors, and photographers, among others. For example, AB5 caps freelance journalists who write for news outlets at contributing 35 “submissions” annually per “putative employer.”

Given that many writers meet the 35-submission cap in a single month, it is a potentially career-ending requirement. It is a threat that has prompted thousands of freelancers to create Facebook groups in opposition to AB5. In the words of a freelance Hollywood Reporter writer: “Everyone’s freaking out, like my anxiety is going through the damn roof.”

The Independent Institute has produced an Amicus brief on a constitutional objection to AB5 lodged by the American Society of Journalists and Authors, Inc. and National Press Photographers Association.

Which brings us to another point: AB5 is “fixing” what isn’t broken.

Based on The Bureau of Labor Statistics data, nearly 80 percent of independent contractors prefer their current arrangement over a traditional job. Most of all, they prefer the flexibility of independent work. For instance, eight in 10 ride-share or delivery drivers work less than 20 hours per week, with most working less than 10 hours a week. About 70 percent of all drivers work less than 20 weeks per year.

Reclassifying them as employees upends the entire system, implementing fixed schedules instead of flexible work.

As a sole proprietor myself, I understand that firsthand: Setting your own schedule is one of the greatest perks of non-traditional work. As California-based driver, Isaiah Etuk-Navajo explains, “I need this kind of independent work and control over my schedule.”

Why mess with his opportunity? Why jeopardize the financial security of hundreds of thousands of entrepreneurs like him? To appease union officials?

The problem doesn’t end with California, either. Bills mirroring AB5 have started popping up in east coast states too, even enjoying the support of presidential candidate Joe Biden and federal congressional democrats.

As the COVID-19 pandemic and social unrest prolong America’s economic recession, the last thing that American workers need is a barrier to upward mobility. Now more than ever, the AB5 nightmare is just adding insult to injury. Californians, and Americans at large, deserve better.

Read the Independent Institute’s open letter to Gov. Gavin Newsom and the California State Legislature here.