After Annie Cherchian’s employer of 18 years closed his law practice, the veteran legal secretary couldn’t make ends meet. With a social security check and small pension, she had only about $100 a month left after her $1,267 rent in Glendale, Calif.
She thought she’d found the answer: Freelancing as a legal transcriptionist for SpeakWrite.com.
SpeakWrite helped her pay the rest of her bills until Feb. 11, when she tried logging into her account on the platform to work and couldn’t get access. SpeakWrite no longer works with California freelancers, according to its position requirements.
The reason: A law called AB-5, which presumes that every worker in the state—other than physicians, accountants, architects and engineers, who were exempted—is a W-2 employee. AB-5 is a California law, but the issue could have national implications. About 57 million Americans were part of the gig economy in 2018.
Some politicians, in some cases working with unions, are taking aim at the gig economy by trying to force employers to treat more of their workers as employees, providing benefits and paying employment taxes, among other things. That’s an expensive and difficult-to-manage proposition.
Rather than take on the burden in California, some companies have opted simply to stop using freelancers in that state.
“Unless we get another stimulus check from the IRS, I don’t know what I am going to do,” says Cherchian.
Democratic presidential candidate Joe Biden has tweeted his support for AB-5 and has publicly supported the federal Protecting the Right to Organize (PRO) Act introduced last year to make it easier for workers to organize. The PRO Act’s fine print contains the same regulatory test that makes it harder for companies to hire freelancers.
The Biden campaign did not respond to an emailed request for comment.
A Double Blow During the COVID-19 Recession
Women and people of color, who are statistically overrepresented among nonemployer firms—the government’s term for businesses with no W2 employees—have born much of the brunt of the law in California. So have older freelancers and those with disabilities, who face discrimination in the workplace that makes it less likely they can find a traditional job to replace their freelance work.
Critics of AB-5 have been redoubling their efforts to fight it in the wake of the coronavirus, saying it is hard enough for people to make a living in California.
Although the Coronavirus Aid, Relief and Economic Security (CARES) Act offered relief to the self-employed who saw business disruptions through the Paycheck Protection Program’s forgivable loans, many one-person businesses had trouble accessing the funding, administered through banks.
The Black Chamber of Commerce, Black Small Business Association of California and Urban League have spoken out against AB-5. At the Black Chamber of Commerce, CEO Edwin Lombard said in a statement, “AB5 has already crushed thousands of black businesses and will keep more from operating in the gig economy.”
In California, AB-5’s sponsor, Assemblywoman Lorena Gonzalez (D-San Diego), has promoted the union-backed bill way to prevent misclassification of workers who should be W-2 employees.
Although the law’s main intent was to protect rideshare drivers, it swept many other types of freelancers into the bill, making a number of companies reluctant to hire those in California, for fear of enforcement penalties. AB-5 and the PRO Act don’t exclude the use of freelancers, but they use a three-pronged ABC test for determining if a worker is a contractor. The “B” prong requires a worker to perform work that is outside the usual course of a hiring entity’s business to be deemed a contractor.
This requirement sparked an outcry from freelancers who work in the same industry as their clients, such as freelance writers who supplement the work of reporters on a publications’ staff by providing specialized coverage—and freelancers have been concerned about this provision in the PRO Act. “We want the ABC test out of it,” says freelance journalist Kim Kavin, co-founder of Fight for Freelancers, a group of freelancers in New Jersey who have opposed a bill in the state that is similar to AB-5.
If a federal law were to pass, it would, with some exceptions, affect workers in states that currently have less restrictive worker misclassification laws, unless they are exempted from federal law.
“Just as with the minimum wage, federal law sets a standard states can exceed but not undercut,” says Larry Mishel, an economist at the Economic Policy Institute in Washington, D.C. “They can be more strict, but not less.”
Regulations Can Have A Similar Effect
Steve King, a principal at Emergent Research, a firm in Lafayette, Calif., says he doesn’t think there would be a big enough Democratic majority in the Senate to pass the PRO Act, but that does not prevent Biden from making administrative changes to labor rules. “I think it’s safe to assume a Biden administration would go back to the Obama rules very quickly,” says King. During the Obama administration, the Department of Labor used the questions of whether a worker is in business for himself or herself and whether they are economically dependent on the business to determine on whether someone was misclassified. Employers worried that the second consideration was a gray area.
“You would see part of what is in the PRO Act would be implemented through administrative executive orders and administrative changes at the National Labor Relations Board.”
Kavin says she hopes that if Biden looks closely at the PRO Act, he’ll see the harm that the ABC test could cause. “Why would anyone in the current economic state of America put forward legislation that is going to throw more people out of work?” she asks. “Something is wrong. There is a disconnect, where he doesn’t understand what the legislation actually does.”
AB-5 took effect on Jan. 1. On June 11, the California State Assembly amended it to make it easier for some freelancers—such as writers, musicians, translators, interpreters and photographers—who were not included in the initial list of professionals that got carve-outs, to run their businesses in the state.
“There was quite a push to make changes,” says King. “I think everybody has kind of figured out that the B rule within the ABC test is just too hard to enforce.”
It is possible for some freelancers whose businesses are still swept into AB-5 to meet the requirements of the law by setting up a formal business entity and following other rules under a B2B exemption, but Cherchian finds it doesn’t make sense at her age. It costs hundreds of dollars a month in accounting and legal fees to maintain even a sole proprietorship.
‘I Just Want To Do Typing For Extra Money’
“At 72 years old, I don’t want to start a business of my own,” she says. “I just want to do typing online to get some extra money.”
Some freelancers didn’t wait around to see if AB-5 would get repealed. Diamond Michael Scott, a freelance journalist who reports on digital currencies, moved from the Sacramento area of California, where he has family, to Denver, Colo., in December, long before the action in June that relaxed some of the requirements that were making it harder for freelance writers to earn a living in the state. He had worked as an HR director in the past and was concerned about AB-5.
“At around that time, the bill had been taking shape,” he recalls. “I thought, ‘This is serious stuff. It’s going to be affecting a lot of people.’”
Eventually, the bill helped to push him over the edge into moving out of state. “It was another reason I decided to leave California,” he says. “It’s just so expensive between the regulations, the state tax and the other ways they get you. It’s a lot of money coming out of pocket.”
This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit www.kauffman.org and connect with www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.