AB5 is California’s new landmark work law concerning independent contractors. It took effect Jan. 1, adding an estimate 2 million contractors and freelancer to employee status.
The law limits classing workers as contractors, and means they must instead be treated as employees by the company they work for. AB 5 gives many — but not all — types of contract workers the same level of labor protection as full-time employees, including statutory benefits such as sick pay, leave and minimum wage.
The legislation opens up a myriad of challenges for HR leaders— those in the state and those elsewhere, but with workers in California. But the long-term benefits of the new law could far outweigh the initial challenges of moving contingent workers and contractors into your organization, and making sure AB5 requirements are being met.
By 2027, it’s estimated 60% of US workers will at least sometimes do freelance or contract work. Already more than one in three workers have engaged in some form of gig work.
HR leaders will need to navigate through traditional compensation plans that are not set up to properly pay remote, flexible workers — wedging them into rigid pay grades and extending the same types of benefits and pay levels mandated by state law for employees to these former contractors.
Even contemporary HR and employee systems are limited and cumbersome in the way they account for contractors and contingent workers. They do not reflect today’s modern workplace, and cannot provide the granular data an organization needs to understand the value employees and contractors bring to the organization. In particular, if workers are supplied by an agency, the cost of that labor, as well as the pay and reward made to individuals is not visible to the client.
Many of those in the gig economy, who contract as independent individuals, like the flexibility this lifestyle offers them, but fitting them into HR systems, especially with their own individual routines and remuneration packages, will be challenging.
An opportunity to improve reporting
One of the consequences of paying contractors via the purchase ledger instead of payroll, is that the total reward data pertinent to contingent workers is not easy to see in total human capital costs. This data, for many organizations, only takes into account full-time employees.
It is possible that companies like Google, reportedly made up of 121,000 contract employees and 102,000 full-time employees, will face a huge amount of work in complying with legislation like the new AB5 rules. However, it also provides an opportunity to update HR systems so they accurately report on all human capital assets, including the contractor workforce.
Using a system that properly records all labor costs, (whether full-time or contractor), means companies will be more transparent in reporting human capital. Comparing productivity and return on human capital will become a lot more reliable.
Cost of complying
A US study in 2018 by the Economic Policy Institute found Uber drivers only earn an income of $9.21 an hour after costs, below California’s minimum wage of $12 an hour for a company of Uber’s size (26 employees or more). That’s a pay gap of 31.5% between Uber drivers and regular minimum wage earners. The impact to platform labor organizations that depend on contractors could be enormous, which is why some of these companies have banded together to overturn the law in a referendum. Lyft, Uber, Postmates and some other gig worker companies have also refused to comply with the law. Court battles have already been launched.
In an age where pay equity is getting an increasing amount of consumer, legal and political scrutiny, organizations need to make sure contingent laborers are being well looked after. The markets also have a right to see what organizations are paying for their labor so being able to transparently report on these costs is essential. Fortunately, the majority of employers want to do the right thing.
Although the AB5 proponents have no real idea what the actual impact on organizations will be. It’s been reported hiring contractors as employees can add 20% to 30% to a business’s costs. Once social security and Medicare taxes, unemployment and disability insurance, workers’ compensation, sick leave, minimum wage, overtime, rest breaks and protections against discrimination and sexual harassment are all taken into consideration, it could be higher.
Earlier this year, rules requiring large employers to submit data to the US government about what they pay their workers, broken down by gender and race were reinstated. Reporting data on gig workers was not mandated and organizations are free to currently skirt around regulatory controls. This lack of transparency within the gig economy could be hiding inequalities that are much worse than reported, especially when it comes to societal issues such as the widening gender pay gap, or underrepresented minorities in the workforce.
Regulators take a dim view of breaches of laws that affect workers. The Securities and Exchange Commission (SEC) is well aware of the lack of transparency in reporting and the problems that often come with it, and is actively seeking comments on how improvements can be made in reporting human capital.
AB5 represents an opportunity for HR leaders to bring a new layer of transparency to the management of their contingent workforce, and that’s an opportunity they should be prepared to take advantage of, for their employees, and their company’s sake.