Freelancers win in California — but the worker classification battle continues

In a week of election surprises, Californians’ apparent full-throated support of Proposition 22 was unexpected. The ballot referendum exempts some freelance workers from a recent state labor law that increased the cost of employing them. More importantly, the voters’ endorsement of worker flexibility sets the stage for a coming national debate: What should be done for the increasing number of freelancers who operate outside the standard social safety net programs? 

The battle over Prop 22 was epic, even by California standards. Corporate proponents such as Uber, Lyft, DoorDash, Postmates and Instacart spent over $200 million in political advertising, while union-backed opponents spent another $20 million. Prop 22 exempts transportation and delivery drivers from the requirements imposed by last year’s Assembly Bill 5 (AB 5), which mandated that employers reclassify most freelance workers as employees.

Doing so raises the cost of employing freelancers by 20 to 30 percent, which would likely force the platform firms to develop different business models that would lead to job losses and stricter scheduling for the remaining workers. That’s a problem, since most freelancers use platform work as a flexible side job that provides extra income while they balance other work or family responsibilities.

Freelancers providing delivery and transportation services were the primary target of AB 5, which exempted over 50 professions from the get-go, with yet more exemptions being added later. The bill was written by the AFL-CIO, which has made unionizing freelance economy workers an explicit goal. Current labor regulations don’t allow independent contractors to organize (for fear of creating labor cartels), and AB 5 offered a workaround until Prop 22’s success. Now AB 5 will only apply to those freelancers who don’t have enough political influence to be awarded a legal exemption. As Trace Mitchell and I recently wrote, the best solution now is to completely repeal AB 5. 

Meanwhile, the debate over worker classification is rapidly going national. More than a dozen states use some variant of AB 5’s “ABC” employment classification test, which presumes that workers are employees unless strict criteria are met. In a similar situation to the California case, Massachusetts Attorney General Maura Healy filed suit against Uber and Lyft in July, arguing that they misclassified drivers as independent contractors.

The major motivating factor in the coming state and national debates will be the fact that employers are legally mandated to provide workers classified as employees with an array of additional benefits, such as unemployment insurance, health insurance and paid time off. Because independent contractors are considered to be separate, single-person businesses, they are not required to be provided the same benefits.

This doesn’t mean they miss out. A large body of research finds that mandated employment benefits tend to reduce workers’ wages, such that total compensation remains mostly unchanged. But some policymakers and pundits argue that the lack of benefits harms independent contractors and that their employers are somehow abusing a legal loophole. 

Surveys of freelancers show, however, that independence and flexibility are paramount — in many cases over pay. Men tend to list “not having a boss” as a primary benefit, while women – often primary caregivers – report having control over their schedule as most important. In other words, mandating a particular classification could deny these workers the very things they need. 

The Department of Labor made this exact point when it recently proposed a new rule to clarify how it would classify workers under the Fair Labor Standards Act. It avoids the ABC test and presumption of employee status, offering workers and employers greater flexibility in their voluntary work arrangements.

An even better route forward would be to untangle social safety net programs from work. The social safety net should be provided directly from the government, rather than mandates that employers provide parts of it. This would require a radical redesign of many existing policies, but the resulting programs would arguably be more effective because of increased transparency. Moreover, this approach would remove the economic distortions caused by Depression-era labor regulations. 

Union regulations should also be reviewed to determine how they can accommodate the rapidly evolving labor force. For example, if Congress reversed the current regulatory paradigm that mandates exclusive representation – where only one union can represent workers in a particular workplace – then it might be possible for independent contractors to organize without facing accusations that they are creating a cartel.

While Prop 22’s passage is welcome news for many freelance workers, the nation faces a much larger question regarding worker classification. We can avoid fighting the same battle in every state if we understand that our current labor regulation framework is poorly tailored to the modern economy. A holistic solution will require going back to the drawing board, detaching social safety net programs from labor regulations and perhaps even getting rid of worker classifications altogether. 

Michael Farren is a research fellow with the Mercatus Center at George Mason University and a coauthor (with Trace Mitchell) of the recent public interest comment “Exploring the Consequences of Worker Reclassification Proposals.”