In the nine weeks since shutdowns from the Covid-19 pandemic began, over one in five American workers have filed for unemployment. From the food services to domestic energy industry, economic shutdowns brought about by government decisions surrounding Covid-19 have negatively impacted nearly every sector of the economy. Yet, parts of the gig economy that provide income for 1.6 million Americans and are responsible for delivering food and supplies to vulnerable members of society have grown 14% from February to March.
Proposals to mitigate the current economic conditions have ranged from government-forgiven loan programs for businesses who keep employees on payroll to extremely generous unemployment benefits which are resulting in 63% of Americans on unemployment receiving more money by not working rather than going back to work. When it comes to maximizing a speedy return to the unprecedented pre-Covid economic prosperity, businesses and entrepreneurs will need maximum flexibility and limited government intervention.
The Trump administration has already taken hundreds of deregulatory actions aimed at getting the government out of the way as businesses navigate volatile conditions. Some in Congress and in the states, however, are pushing policies that would hinder the recover rather than make it possible. One such pursuit is the ongoing assault on the gig economy. These freelancing independent contractors perform tasks such as delivering groceries or passengers, writing code or news stories, and have significantly more flexibility than traditional employees. From Speaker Nancy Pelosi (D-Calif.) to presumptive Democrat nominee for President Joe Biden and California Governor Gavin Newsom, Democrats nationally are attempting to strictly define and restrict the nature of these new employment agreements in America.
Recent state efforts to reclassify independent contractors working within the gig economy began in California, when the legislature passed, and the governor signed Assembly Bill 5 in September of 2019. This legislation established an “ABC Test” that must be met in order for someone to be classified as an independent contractor, rather than an employee.
The two most difficult provisions of AB5’s ABC Test are to prove are that a worker “performs work that is outside the usual course of the company’s business” and that they are “engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.”
Simply put, for Uber to pay a California rideshare driver, they must transform their entire business model and give up the efficiencies and advantages that ridesharing offers both drivers and customers when compared to traditional taxicab services.
The ability for both drivers and riders to use digital ridesharing applications has resulted in drastically shorter wait times as consumers can compare both competitive pricing and times, while drivers have the ability to deny rides they see as unprofitable or inefficient. Furthermore, incentives based on the mutual rating of both parties have raised the bar of satisfaction that rideshare services provide compared to traditional taxi cabs.
While companies like Uber, Lyft, and Doordash have all pledged to fight the implementation of AB5 by putting the issue before voters this November, threats to the upstart industry don’t begin and end in California. At a national level, House Speaker Nancy Pelosi has pushed the Protecting the Right to Organize (PRO) Act through the House of Representatives. The PRO Act would adopt California’s “ABC Test” for independent contractors on a national scale. Joe Biden has also endorsed the PRO Act and signaled he would sign it into law if elected.
Barclays analysts have estimated following AB 5 reclassifications in California, Uber and Lyft are facing a cost increase of $3,625 per driver each year resulting in hundreds of millions in additional costs, driving already slim margins to near zero. The consequences of the Democrat effort to reclassify employment are not limited to employers, however.
Fewer than one in ten independent contractors want to be reclassified, namely due to the fact that working as an independent contractor allows for greater flexibility and control of hours as a side-job compared to employer mandated shifts. Furthermore, while regular IRA retirement contributions are capped, 1099 independent contractors can contribute nearly ten times what a regular IRA allows using a Solo 401(k) or SEP IRA.
With many Americans seeking to get back to work, the gig economy is one sector that has enormous potential to put money in the pockets of those struggling adults seeking immediate income-generating work that provides maximum flexibility.
As millions of Americans work to financially recover from the Covid-19 pandemic and potential recession, efforts including the PRO Act endorsed by Joe Biden have the potential to completely implode the flexible American gig economy. Anti-gig economy efforts will not only result in worse unemployment figures but will deprive millions more of urban transportation and food delivery services that are more necessary today than ever before.