In terms of regulations, the gig economy has been a bit of a Wild West, with companies such as Uber, Doordash, and Lyft taking advantage of the regulatory grey area around the difference between an “employee” and “independent contractor,” often to the benefit of their bottom line. Governments and regulatory agencies have been slow to react to the on the ground reality of freelance work. While they still have a long way to go, they may finally be starting to catch up and for this reason, 2020 is shaping up to be a huge legal year for the gig economy. It all centers around the passage of California’s AB5 Bill, what could be considered the opening shots in what is surely to be an ongoing war between regulators and companies whose business models depend on freelancers.
This single bill has the potential to be a game changer, which is why it has already spawned many legal challenges even though it will not be in effect until January 1, 2020.
For those who are unaware, Bill AB5 focuses namely on what it means to be an employee vs. an independent contractor. Up until now, companies have been given a great deal of leeway in how they applied these definitions to their workers. AB5 aims to change that by applying the same criteria to almost all industries. Now the onus is placed on the companies to show that their freelancers are in fact independent contractors and not employees. In order to prove this, they must show that:
- That the worker is free from the control and direction of the hiring entity in performing the work, both in the contract for performance and in fact
- That the worker performs work that is outside of the usual course of the hiring entity’s business
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity 1
This definition has sent companies that rely on freelancers for their “usual course of business” scrambling to find a way around these new requirements. Many have spent millions lobbying to be exempted from these requirements. While some have successfully convinced the California legislature to give them an exemption, many will still theoretically need to be in full compliance with the law when it comes into effect.
The Gig Wars
This bill is clearly just the start of what will undoubtedly amount to a long-running legal war between regulators and freelancer dependent industries. Those who were not successful in carving out exemptions for themselves are firing back. Uber, Lyft, and Doordash have already invested some $90 million into bringing the issue to a statewide ballot initiative with the hope that the voters of California will give them relief from these requirements. Others, such as the California Trucking Association, are filing lawsuits against the bill.
But California representatives who support the bill are not taking this laying down, as Representative Lorena Gonzalez, for example, is encouraging attorneys to file their own legal actions as soon as the bill goes into effect, to ensure that companies are properly classifying their workers.
The end of the Freelancing Wild West?
So where does freelancing go from here? Regardless of the outcomes related to AB5, this bill is part of a larger trend as government agencies are finally starting to pay more attention to an industry that has, for the most part, been almost completely Laissez-faire up to the moment. A similar bill has already appeared in New Jersey, Democratic presidential candidates Elizabeth Warren and Pete Buttigieg have both openly criticized companies that utilize independent contractors, with Warren already having developed a plan to protect part-time seasonal workers (which could easily be seen as laying the groundwork for future plans of hers regarding independent contractors).
The government is finally starting to take notice of the gig economy and this is going to have a massive impact on the industry in the coming years. Regulation, especially of new industries, is often slow and cumbersome as the government tries to apply or adapt old models of regulating to emerging industries. Now that the government is finally paying attention, one can anticipate a slew of new bills coming down the pike as the government tries to find the silver bullet to properly regulate this industry. With these new laws will come new legal challenges as freelance dependent companies try to preserve their way of doing business. Being able to spend millions on lobbying or legal actions may now become part of the price of having a freelancer based business model. New entrepreneurs may be hesitant to enter, what is still often seen as the future of work, due to the uncertainty of the industry. Depending on the bills that are passed, entire business models that at one point were viable could become illegal.
Through our experience working with 20+ temporary staffing companies at FromWolf, we have learned the importance of correct classification and the risks associated with incorrectly classifying workers as independent contractors. The staffing companies we have worked with know the ins and outs of the regulations in their market intimately and are always watching where the legal winds are blowing. Wolf, being a completely off the shelf on-demand staffing platform, had to be built to be agnostic regarding the employment type classification, able to adapt to whatever the temporary staffing company’s business model is. Depending on how things shape up legally, staffing companies may have a lot fewer options on how to construct their business model in the future, at least when it comes to classifying their workforce.
Surveying the current legal landscape, we can see this going down one of two ways. If regulation tightens up, we will see more businesses going the traditional staffing company route. If something more akin to the loosely regulated status quo is maintained or further deregulated, however, we might see existing temporary staffing companies moving more employees from W2's to 1099's. One thing is for sure though, pure tech companies like Uber are going to be entangled with the temporary staffing processes one way or another. The question is simply how much will they have to change their business model (or fight to keep their current one) to fully enter this industry.
2020 may be the first landmark year in what is sure to be a long-running battle between regulators and the gig economy and only time will tell how it will end. But one thing is certain, the government is finally starting to catch up and the Freelancing Wild West may have its days numbered. Now is the time when the expertise and knowledge of existing temporary staffing companies become even more priceless. A deep familiarity and experience with the staffing industry will be essential as the legal landscape of gig work changes.