Talent Management
December 12, 2019

AB 5 Could Be Hurting Freelancers Instead of Helping. It’s Time to Consider Alternative Worker Classifications

Since the end of the recession in 2009. An unprecedented streak of job growth has been the prevailing narrative in the United States. Around September, the national unemployment rate sank to 3.5%, the lowest threshold since the 1960s. However, this growth has not reflected a level playing field across the country. As Michael Sauder pointed out for 24/7 Wall St., there are 25 metro areas struggling economically, with “weak labor markets, including high poverty, high unemployment, and low incomes.” According to the most recent ADP National Employment Report, job growth is beginning to slow, dipping down to a 1.5% year-over-year gain, the slowest since 2011. If this is a warning sign of troubles ahead, California’s contentious AB 5 will certainly wreak more havoc. Elaine Pofeldt’s reporting for CNBC offers a startling assessment of the new employment law, which “has boomeranged and is starting to crush freelancers.”

AB 5’s Tricky Trek: Unintended Victims, Uncertain Outcomes

In early November, we discussed the challenging assembly bill and its potential ramifications for hiring organizations, staffing providers, and gig economy talent. Freelancers, independent contractors, and other people choosing alternative work arrangements are already feeling the squeeze, even though the law won’t officially go into effect until January 1, 2020.

“In their zeal,” Erik Sherman wrote for Inc., “lawmakers went too far and decided that many formerly independent workers should be traditional employees. For freelance journalists, as an example, that easily appeared to clear the top of outrageous when the law set a limit on the number of times a person could work for a publisher in a year without having to be an employee. Although, according to Veena Dubal, an associate professor of law at the University of California Hastings, there’s a lot of misinformation and many freelancers who assume that they’re covered under the restrictions of 35 pieces per year for a client aren’t if their work is considered sufficiently ‘creative.’ (That doesn’t apply to straight reporting on facts.)”

AB 5 will have profound and likely negative impacts on freelancers in industries that range from journalism to trucking, entertainment, music, television production, and freelancers working for California companies outside the state. Historically, other states often follow the lead of California, so similar laws seem inevitable in places like New York, New Jersey, and more. According to Upwork’s 2019 Freelancing in America survey, 57 million American freelancers contribute an excess of $1 trillion to the economy each year. If laws like AB 5 curb or significantly hobble their ability to work, the U.S. economic bonanza could be in peril.

“The law requires most companies to reclassify contract, freelance and contingent workers — the backbone of the gig economy —as full-time employees eligible for benefits, a guaranteed $12–$13 state minimum wage and protections under the state’s employment law,” Pofeldt explained, summarizing AB 5. Although the intent was to provide a safety net for independent talent, legislators appeared to neglect the fact that many freelancers have chosen autonomy—and that apart from guaranteed health benefits and labor protections, becoming a statutory employee for a company won’t be nearly as lucrative. Freelancers are already noting the potential for much lower wages, inflexible schedules, fewer growth opportunities, and more. Even worse, the pool of clients and once available projects is already drying up.

AB 5 Might Be Punishing the Freelancers, Not Saving Them

Pofeldt detailed the situation of Jeremiah LaBrash, a 36-year-old tech programmer for a telecom by day and a freelance cartoonist for media companies during his time off. Sometimes, his freelance work accounts for half his annual income. That’s abruptly changed:

LaBrash, based in Los Angeles, suddenly found potential projects drying up when he submitted onboarding paperwork to potential clients and they discovered he lived in California.
“I’ve had them hire me and then come back and say they’re no longer interested,” says LaBrash. “All of a sudden, someone I’ve never talked to says, ‘We’ve decided not to move forward.’ I’ve never had that happen before this year.”
LaBrash can’t be certain the reason is AB 5, though he believes it is. He has seen a 40% decline in his freelance income since the law passed in September. “My savings are stagnant,” says LaBrash. 
Even if employers hire him for freelance work, he is limited to 35 annual submissions per client before they have to put him on payroll, he notes. It’s a limit under the law. That’s not a large amount for regular contributors to media companies. “You’re going to hit your quota and they won’t want to hire you,” he says.

The law could also affect franchisors, who might be reclassified to employees rather than independent contractors. Then, of course, we return to the complications of location. Steve King, a partner in Emergent Research, which studies the freelance economy, has already seen organizations drafting policies to exclude California freelancers from consideration:

Emergent Research recently discussed the law with a California-based corporation that was changing its freelance hiring policies, says King. “They told us they were going to stop hiring California-based independent contractors,” he says.
Some industries, such as media and tech, could especially be hard-hit. “There’s a lot of nervousness in Hollywood about how this gets interpreted — there are so many freelance creatives,” says King. 

Although California lawmakers had hoped to help gig talent overcome unstable or precarious work arrangements (primarily focusing on ride-sharing drivers it seems), they may have unwittingly stifled entrepreneurs, franchisors, consultants, and other high-earning independent professionals. And that means the economy will feel the sting as well.

It’s Time for Alternative Employment Classifications

Dependent Contractors

The conversation about employment classification has become too nuanced in the sharing economy to continue relying on 20th century ideologies and regulatory standards. In countries such as Canada and Sweden, a third class of talent exists: the dependent contractor.

A dependent contractor lies somewhere between an employee and an independent contractor. Dependent contractors are workers who, although genuinely self-employed, receive all or most of their income from a single client. Like employees, they are entitled to reasonable notice of termination and the right to unionize. As Alan Hyde of Rutgers University points out: “Such workers are self-employed for some purposes, say tax administration. But if their livelihood depends on the richer entity that hires them, then that entity is bound by labor laws when it administers tips or compensation.”

Social Safety Nets

In terms of creating a social safety net for independent gig talent, Steven Hill, a senior fellow with the New America Foundation, drafted a compelling plan for Individual Security Accounts (ISAs), predicated on existing models such as the multiemployer plans already in place for construction workers, health care professionals, miners and even some Silicon Valley independents between projects. Already mandated statutory costs are still covered, and the program would incentivize insurance companies to participate as providers of ISA plan elements, further reducing costs as economies of scale come into play.

Multiple employers pay a few dollars per hour that’s invested in the ISA. The amounts are prorated according to the number of hours worked, or a percentage for contracts based on the completion of work. All statutories are accounted for in the ISA, ensuring that the IRS receives its share.


There’s also a role for evolving MSPs to play in this. MSPs already have years of expertise designing and overseeing independent contractor engagements, including onboarding, ongoing administration processes, billing and invoicing, and mitigating clients’ exposure to compliance risks. They handle performance in the same way they would with any outsourced service provider or supplier. So the independent contractor is treated as a vendor, or in other words, a standalone business entity with administrative and billing support.

  • Design an environment for independent contracting that focuses on standardization, consistency and compliance.
  • Build document management portals, maintained in a controlled environment.
  • Limit any perceived managerial roles with independent talent: administration and onboarding procedures are performed by the MSP; regular communication occurs between the independent service providers and the MSP, only in relation to contractually bound and scheduled milestones, deliverables and Statement of Work (SOW) commitments -- not employee related issues such as attendance, timekeeping, hourly productivity checks, etc.
  • Act as a payment processing agent between the independent and the client, with terms that are clearly outlined upfront in Professional Services Agreements (PSA) and SOWs. The billing structures are negotiated to ensure that financial control factors are adhered to.
  • Restrict the inclusion of independent contractors in company functions unless absolutely necessary to the performance of the work as contractually stated.
  • Direct all HR related information to the independent contractors.
  • Reassess independent talent who remain on projects longer than a predetermined amount of time, addressing red flags.   
  • Ensure that the utilization of independents occurs for specific, specialized work only, such as projects with established start and end dates that full service employees are not performing.

There is no clear solution at hand, but there are plenty of options. What doesn’t seem to be a viable strategy, however, is rushing to legislation with ambiguous laws and regulations that ostensibly harm those they purport to avail. California lawmakers could write in amendments and clarifications to balance out the uneven rules, but that remains to be seen.

Image by Gerd Altmann from Pixabay

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