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In The Most Entrepreneurially Innovative State, The Politicians Hate Innovation So Much They Are Determined To Kill It.

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California may have just passed a death sentence on the gig economy.

Late Tuesday night, as many California residents slept in their beds, the state legislature passed a bill that is expected to impact hundreds of thousands of independent contractors across the state.

For months now, the state assembly has been debating controversial legislation seeking to redefine how companies classify independent contractors. Directed at the gig economy, which is comprised of mainly contractors, Assembly Bill 5 (AB5) proposed changing the status of workers within the state from freelancers to actual employees—completely changing the model of the burgeoning sector. In 2017, 55 million people, or more than 35 percent of the US workforce, were participants in the gig economy.

Major gig economy participants Lyft and Uber spent a fair amount of money trying to fight this legislation, but to no avail. It passed with a vote of 29-11 and is expected to be signed by Gov. Gavin Newsom soon—putting the future of California’s gig economy in question, if not the entire country.

Over the last several years, the gig economy has grown significantly across the country. According to the Bureau of Labor Statistics (BLS), in 2017, 55 million people, or more than 35 percent of the US workforce, were participants in the gig economy. By 2020, that number is expected to jump to 43 percent.

These numbers should serve to prove just how popular the gig economy is with both workers and consumers, but California labor activists are concerned that gig workers are being treated differently from most employees. In a sense, they are not wrong, because when it comes to the gig economy’s unique model, “employee” takes on a different meaning than it does in other sectors. But this isn’t necessarily a negative.

You might ask yourself what makes the gig economy appealing to workers. The answer is simple: freedom and flexibility.

As a traditional full-time employee, most are required to work a certain amount of hours for their employer each week—usually during specified office hours. If work needs to be missed for some reason, your employer will usually give workers a set amount of sick or vacation days to use at their disposal.

In exchange for your work, your employer may offer you other benefits, but there are also “protections” that come with this official “employee” status. Worker “protections” that fall under the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act are meant for employees, not contractors. The same is true with minimum wage, overtime pay, health insurance, and unemployment insurance.

All this considered, you might ask yourself what makes the gig economy appealing to workers. The answer is simple: freedom and flexibility.

An Uber driver does not punch a clock, nor does he or she subscribe to any set work schedule. Instead, gig economy workers are free to work, or not work, whenever they choose. If you wake up and decide you want to go on vacation, you can. You don’t need to call your boss or use your vacation days, you just choose not to work that day.

This flexible arrangement has proven popular, especially with young workers. And it has given many Americans a chance to better their lives by allowing them to supplement their incomes whenever they can.

A recent college grad earning $40k a year may quickly discover this isn’t enough to cover rent, living expenses, or student loan payments in California. However, since driving for Lyft or Uber allows you to make your own schedule, many are able to work during the day and drive a few hours at night while being able to pay all their bills.

The state of California has presumed to understand the wants and needs of each gig economy worker through the passage of AB5 and the entire gig economy may suffer as a result.

This flexibility and income are precisely why so many people have been eager to participate in the gig economy, even if that means giving up other benefits offered in traditional employee/employer settings. Sure, someone looking to make a few extra bucks could get a part-time job, but that would still involve coordinating schedules and being required to work a set amount of hours.

This just isn’t feasible for everyone, nor is it desirable. Plus, most jobs have a lengthy hiring process, but for those needing additional income now, the gig economy lets them onboard quickly and get right to work.

Ultimately, these gig economy workers have made the choice to forgo these employee “perks,” because they believed the benefits of the gig economy outweigh any potential negatives. And it is their right to do so.

Yet, despite this being a personal decision that should be made by each individual, the state of California has presumed to understand the wants and needs of each gig economy worker through the passage of AB5. And the entire gig economy may suffer as a result.

If, but most likely when, Gov. Newsom signs the bill into law, the gig economy is going to look quite different in California. For starters, each company will have to apply the “ABC test” to determine a worker’s status.

In 2018, the California Supreme Court handed down its ruling in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The ruling, now known as the “Dynamex decision,” dealt with the employment status issue of contracted delivery drivers and instituted the “ABC test” as a means of determining whether or not a person is an employee or a contractor.

The ABC test specifies that a contractor must be:

  • (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work
  • (B) that the worker performs work that is outside the usual course of the hiring entity’s business
  • (C) 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

If a worker does not explicitly meet this rather broad set of criteria, they are considered an employee, not a contractor. This means that companies like TaskRabbit, DoorDash, Uber, and Lyft will have to treat these individuals as employees, offering them minimum wage, benefits, and all the perks that go along with it.

The gig economy was never meant to be a traditional sector, so treating it as such belittles what it actually is. In fact, much of the reason it has been so profitable for all involved is because its model is brilliant.

Now that one state has committed to essentially dismantle the gig economy, it is likely that others will follow suit.

With Uber, for example, the cars are owned by the contractors, saving Uber overhead costs of buying property. And since these drivers are willing to trade traditional worker benefits for the freedom to earn money whenever they want, Uber has also been able to cut costs and give more people the opportunity to supplement their income.

But when AB5 goes into effect, which could take a while given how it completely upturns the sector, these companies will suddenly be left with costs for which they never planned. For many, these costs will be impossible to afford and could signal their end. And with fewer gig economy options available to workers, that means less financial opportunities for would-be hardworking Californians.

In anticipation of the new law, Uber has already had to cut hundreds of employees in a massive layoff. When the law goes into effect, it will only get worse.

Hopefully, other states won’t use California as an excuse to implement similar policies, but therein lies the real danger with AB5. Now that one state has committed to essentially dismantle the gig economy, it is likely that others will follow suit.

California legislators may think they are protecting workers, but their actions will have the opposite effect. Each person should be allowed to decide the nature of their relationship with an employer. If you want to take the traditional route, that’s your prerogative. The same is true if you choose to participate in the gig economy.

 

Brittany Hunter is a senior writer for the Foundation for Economic Education.

Photo credit: Robert Anasch on Unsplash

California Consumers Narrowly Escape State’s Proposed Tax on Text Messaging

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California is no stranger to excessive taxation. In fact, The Golden state even has a “fruit tax” that taxes consumers 33 percent for buying fruit from a vending machine. Though oddly enough, there is no fruit tax applied to purchases made in a grocery store. But now, in an unprecedented move, the state recently attempted to levy a tax on text messaging highlighting just how abusive the system really is.

Taxing The Telephone

California’s Public Utilities Commission (CPUC) is the agency given jurisdiction over all telecommunications within the state. Since telephone calls fall under the category of “telecommunications” the CPUC has the legal authority to tax each call and has been doing so for years. But now, CPUC would like to extend this tax to text messages, in an attempt to extort more money from its residents.

Long before mobile devices were the norm, landline telephones were in practically every residence. And it didn’t take very long before the government found a way to profit from this modern convenience. Public Purpose Programs or PPPs were created as a means of taxing telephone users. The purpose of these PPPs was to charge telephone users a surcharge for each telephone call they made. This money would then be added to a fund that was used to subside services for those with lower incomes in order to help them pay for other utilities, like electricity and gas.

When the internet came into being, the CPUC was not able to tax internet use since the industry was able to define itself as “information services” rather than a traditional form of “telecommunications.” Since both email and web browsing were quests for information, rather than just communication, the internet was safe from the greedy hands of the government.

But now that text messaging has been around for over 20 years, the government has finally found a way to justify another means of stealing money from California residents.

The Text Messaging Tax

Since text messaging has become a primary form of communication for younger generations, and just about everyone else, the PPPs funding has decreased by ⅓. But instead of readjusting the budget in order to make it more feasible with the lost revenue, the budget for these PPPs has actually doubled as its funding has decreased. But as is typical of the public sector, the CPUC has chosen to take this money from California residents, rather than go back to the drawing board and slash the budget.

If the new tax is levied, it would bring in an additional $44 million a year. But as if this wasn’t bad enough, there was also talk of retroactively applying this tax for five years, which would cost Californians upwards of $220 million. However, there was no proposal for exact rates, so these numbers are speculative. It is also unclear whether or not the state was planning on levying a “per text” rate, or if it would be a flat rate included on all California taxpayers’ monthly phone bill.

CPUC spokeswoman Constance Gordon spoke very matter-of-factly about the proposal, saying:

“From a consumer’s point of view, surcharges may be a wash, because if more surcharge revenues come from texting services, less would be needed from voice services. Generally, those consumers who create greater texting revenues may pay a bit more, whereas consumers using more voice services may pay less.”

The telecommunications industry is obviously not happy about this and is insisting that like email, text messaging falls under the category of “information services, making them exempt from this ridiculous tax.

Jim Wunderman, president of the Bay Area Council business-sponsored advocacy group, commented on this absurdity, saying, “It’s a dumb idea. This is how conversations take place in this day and age, and it’s almost like saying there should be a tax on the conversations we have.” Hopefully, this comment didn’t give the California government any further ideas.

Still, it is likely that if the proposed tax became a reality, many consumers would just switch to using messaging apps instead. Already, many people rely on apps like Facebook messenger or What’s App to communicate with their contacts. Since these apps are a more clearcut and defined example of “information services,” they are free from government taxation. And while this is great for consumers, since it creates a loophole, it would be mobile phone providers at a loss.

CTIA, a firm that represents major mobile service carriers including AT&T Mobility, Sprint, T-Mobile, and Verizon complained to the FCC. In its filings, it said, “Subjecting wireless carriers’ text messaging traffic to surcharges that cannot be applied to the lion’s share of messaging traffic and messaging providers is illogical, anticompetitive, and harmful to consumers.”However, this absurd story has a happy ending.

A Happy Ending

In order to legally institute this tax and levy it on residents, the CPUC needed the approval of the FCC. Originally, the proposed tax was not set to be voted on until January 10, 2019. But for California consumers, Christmas came early this year.

Last week, the FCC issued a new rule officially declaring that text messages fall under the realm of “information services,” keeping them out of reach from the CPUC. While the CPUC could have pushed the issue, which may have resulted in it being brought before a judge, it has decided against this. CPUC Commissioner Carla Peterman has since withdrawn the proposal, sparing California residents from this monstrosity of a tax.

Unfortunately, California serves as a prime example that the government will literally try to tax anything it can, no matter how ridiculous it may be.

Write for CFI