California Killing Its Gig Economy

If you haven’t listened to California’s Democratic leaders (and who can blame you for that), you wouldn’t know that our state is the world’s fifth-largest economy and a model for the rest of the United States. We are the heart and soul of the growing gig industry, a place where entrepreneurial ideas take root and dreams are fulfilled, blah, blah, blah.

State officials have problems understanding cause and effect or are unfamiliar with the word “despite.” Entrepreneurial ideas still take off in Silicon Valley, but it’s not because of California’s tax and regulatory policies. The economy is growing — and the web-based, internet industry in particular — notwithstanding the state’s efforts to quash it.

To date, California’s public-policy-driven crises have been a slow-moving train wreck. It’s taken decades for, say, the California Environmental Quality Act (CEQA) and various slow-growth measures to totally destroy housing affordability in every major metro area. In the past, homes here were expensive — but now you probably need to be a tech mogul or a trust-funder to buy a modest condo in San Francisco, Santa Monica, or Orange County.

California’s schools were among the best in the nation, as was our system of roads and freeways, as late as the 1970s. Now, we’re tops mainly in poverty rates and the amount of money we pay retired public employees. How many other states can’t even keep the electricity on for millions of residents? These realities — the result of public-policy choices, of course — took place over time, so we’ve all gotten accustomed to the new normal. But with progressives firmly in control, the timeline from bad policy to painful disaster is shortening.

The best example is Assembly Bill 5, the new California law that bans companies from relying on independent contractors to serve as their main workers. The brainchild of the state’s politically muscular unions, the legislation will turn the gig economy on its head by destroying the employment model that’s fundamental to these entrepreneurial businesses. The issue centers on a 2018 California Supreme Court ruling known as the Dynamex decision.

In that case, a same-day delivery service switched its pool of permanent workers to contractors, and some of those workers challenged this change. In an amazing display of judicial activism, the court imposed an “ABC Test” to govern when businesses are allowed to use contractors. The workers must a) be free from the company’s control, b) engaged in work that is not part of the company’s prime business, and c) clearly operating as an independent business (by, for instance, having established an independent company). Every one of those ABCs must be met.

In practical terms, that means that a delivery service or ride-sharing app, or even a barbershop or real-estate agency or publication, can hire a plumbing contractor to fix a leaking toilet, but it cannot use contractors as drivers, barbers, agents, or photographers. The Legislature needed to do something, but it could have, say, created a third category of worker or deleted the decision altogether. Instead it codified Dynamex as written. Then, it exempted vast categories of workers (lawyers, physicians, insurances salespeople, etc.) represented by the influential lobbies. That leaves a handful of old-line industries (rabbis, exotic dancers, land surveyors) affected by the decision, as well as nearly all of these new app-based companies. The latter clearly are the target of the law.

Unions are cheering, of course. But it’s hard to believe that companies are going to start hiring contractors as W-2 employees, who will then sign up for a union card. Instead, companies will cut back on jobs, with more than 8 percent of the state’s workforce in danger of losing substantial portions of their income. The typical ride-share driver works four hours a week to supplement other work, so this work will evaporate — as will our ability to easily and cost-effectively grab a ride. (Don’t worry, though, you can still flag a dirty, overpriced taxicab.)

People who enjoy the flexibility of freelance work will have to look for new jobs in a cubicle or a factory floor. Well, replace “factory floor” with “fast-food restaurant,” given that Earth-friendly California doesn’t really do factories anymore, but you get the idea. The whole mess will be sorted out in coming months, but one day soon you might be heading to the big-box store to buy everything because you will no longer be able to have online orders delivered to your door.

There still is some hope that disaster can be avoided. Uber, Lyft, and DoorDash recently announced a ballot initiative for the November 2020 election that would exempt delivery drivers from AB 5. To help win support and open the door to legislative negotiations to avert a costly ballot showdown, the measure promises various benefits to drivers. These include guarantees that they will earn 120 percent of the minimum wage, health-insurance stipends, and insurance programs. It’s a fair deal, but it’s always a crapshoot with California voters. The same people who might vote against the measure will no doubt loudly bemoan the loss of an affordable Lyft ride.

The initiative’s backers still have to overcome whatever title and summary the state’s union-allied Attorney General Xavier Becerra will issue. AGs are responsible for providing the official ballot descriptions, which typically are the only verbiage voters read before engaging in their civic duty. As the Orange County Register explained, the AG “has not acted in good faith in naming other measures. For instance, Becerra’s summary of an initiative that would raise commercial property taxes is so slanted that it sounds like it’s written to boost its passage.” (I expect it to be named something like, “Measure to destroy the economy and endanger police officers.”)

If California voters don’t reverse AB 5, then the state might really learn what life is like without such a boisterous gig economy. AB 5 sends a clear message to entrepreneurs with other innovative ideas that circumvent the state’s innovation-crushing array of labor regulations: “Don’t bother. Your ideas and businesses aren’t wanted here, unless you’re ready to hire a team of permanent unionized employees.” The only silver lining is that this time, lawmakers have put their progressive ideas on a fast track, so it’s not going to take decades to witness the ill effects.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

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Author: Steven Greenhut

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