New Research Quantifies Harms to Independent Contractors of California’s AB5

The Mercatus Center at George Mason University has published a first-of-its-kind policy study analyzing the effects of California’s Assembly Bill 5 (AB5). This law reclassified hundreds of thousands of independent contractors (ICs) in the state causing them to lose gigs, income, and livelihoods.

This research quantifies the negative impacts of the law on statewide employment augmenting the countless stories of ICs. 

Background

The AB5 law codified a 2018 California Supreme Court decision known as Dynamex, which forced the company to reclassify its independent contractor drivers as employees. Former California Assemblywoman Lorena Gonzalez used this as the launchpad for AB5, and instituted the ABC test which is meant to determine whether a person is truly an independent contractor or should be classified as an employee. This overly broad and sweeping test requires that (A) an independent contractor be free from the company’s control, (B) that they provide services that are not the same or similar to the business model of the contracting company, and (C) that they set their own rates and hours. The majority of independent contractors do not pass the B prong, effectively eliminating their status. Since January of 2020 when AB5 became enforceable, hundreds of thousands of independent contractors lost their ability to provide for themselves, virtually overnight. As part of its legal analysis, employment and labor law firm Littler, Mendelson explained in a March 2020 missive:

“By many measures, AB 5—and the ensuing debate in other states and nationally about worker ‘reclassification’—stands as one of the most significant developments in labor and employment law in decades… Its effect and policy implications cannot be understated.”

Independent contractors affected by AB5 have been documenting their stories through groups like Freelancers Against AB5 and a blog series called “Chasing Work.” These California independents talk about the adverse effects the law has rendered on their professions and their livelihoods. 

One of the biggest complaints made by the ICs is that there was no research or consultation done before the state legislature voted to upend over 600 professions and somewhere in the range of four million livelihoods. However, from the standpoint of research, these AB5 stories are still considered anecdotal evidence. What policy wonks and lawmakers require is verifiable data that can be studied, weighed, and reported when considering such laws for their entities.

The Findings

The Mercatus Center study does just that. Institute senior fellow Liya Palagashvili, Seton Hall University assistant professor of economics Paola A. Suarez, and Mercatus fellows Christopher M. Kaiser and Vitor Melo examine through empirical means how AB5 affected the labor market. The researchers took a period from January 2011 to September of 2023, four years after the 2019 law was signed, and focused on overall employment and labor force participation, traditional employment, and self-employment.

Here are some of the key takeaways:

Despite AB5 proponents’ claims that the law would increase full-time employment and offer benefits and protections, the researchers found “robust evidence that AB5 is significantly associated with a decline in self-employment and a decline in overall employment.”

·         AB5 reduced the level of self-employment by 6.7 percentage points to 28%.

·         AB5 reduced the level of overall employment by 7.3 percentage points to 14%.

·         The researchers did not find significant evidence that AB5 increased W-2 employment.

Even in cases where the researchers noted an increase in W-2 employment, this increase was not weighty enough to offset the significant decreases that occurred in self-employment.

There is also some evidence that AB5 is associated with a decline in the labor force participation rate. AB5 reduced the level of labor force participation by 6.5% – 7.6%. 

Palagashvili polled small businesses through the SBA (Small Business Administration) and she discovered that while there were some instances where the independent contractor chose not to take on work, there were a prevalence of cases where the businesses could not hire the IC because of the lack of clarity and fear of liability from the AB5 law. Some businesses were forced to shut down completely because they were no longer able to hire independent contractors. 

The study shows that self-employment fell 10.5%. AB5 resulted in both a chilling effect and a tangible reduction of labor, and women independent contractors, entrepreneurs, and small business owners have been severely impacted. The freelance transcriptionist industry as well as online tutors are among the female-dominated professions that have suffered under the California law. Many of these ICs had to leave the state in order to maintain their freedom to work as they chose.

Implications

The good news: this research is clarifying. Finally, we have certifiable data that aligns with the anecdotal evidence presented in the AB5 stories. However, other states and the Democrat legislators in both Houses of Congress are still working to spread AB5’s damages nationally. In 2023, Democrat senators reintroduced the Protecting the Right to Organize (PRO Act). This act seeks to apply the ABC Test without exemptions, and forces unionization while eliminating right-to-work in all states. 

On January 10, 2024, the United States Department of Labor issued its revised Independent Contractor Rule which uses the ABC Test as a model in its six-pronged requirements for self-employed individuals and small businesses to prove their independent contractor status. Barring the rescission of this rule by the Congressional Review Act, the Rule will take effect on March 10, 2024. 

Because we have a quantifiable window into the damage AB5 did to California employment, imagine what the IC Rule applied nationally will do to the nation’s employment. It is frightening to consider.

More studies are necessary to mitigate the wholesale adoption of policies and laws that harm the American workforce and destroy women’s ability to innovate, build businesses, and maintain the freedom to work as we choose. The Mercatus Center researchers say it is difficult to empirically calculate the impact of independent contractor work due to a lack of data on how many of us make up this sector. 

Economic and labor institutes with bigger donor bases should take up this cause. The more people who can verify the impact that independent contracting has on the economy, the better the quality of the data, and the stronger the bulwark against the forces that wish to attack it.