There's no denying that the gig economy is thriving. Much of this growth is driven by both massively well-funded private companies as well as public tech giants that are capitalizing on an unprecedented era of consumer demand for convenience, no matter the goods or services. As a result, more than 57 million Americans—35 percent of the U.S. workforce—performed freelance or gig work in 2019, contributing an estimated one trillion dollars to the overall economy.

With the introduction of third-party apps that enlist independent contractors to facilitate rides, deliveries, dog walks, grocery shopping and numerous other on-demand services, many freelancers are able to join the gig economy with ease. Similarly, many businesses are able to capture new customers by joining these platforms. It all seemed to fit together nicely—until recently, that is.

Along with the freshly signed California Assembly Bill 5, the current state of the gig economy as we know it has been flipped upside down – and gig workers and employers should be prepared for major change ahead.

Assembly Bill 5: So what is it really?

Following months of deliberation and debate, Assembly Bill 5 (or AB 5) has been officially signed into law by California Governor Gavin Newsom. The law took effect January 1, 2020 and reclassifies many independent contractors as employees, and in turn, forces gig economy companies to offer rudimentary labor rights like minimum wage, overtime and paid leave to their workforce.

This is a significant measure that many gig workers have long been advocating for. However, there are also many workers who joined the gig economy purely for the flexibility it offers, and AB 5 will minimize this perk.

For instance, as the business model currently stands in states other than California, drivers for third-party delivery apps have the freedom to pick up and deliver food, whenever their schedules allow, for a quick buck. They also aren't restricted to a minimum or maximum number of hours they can work per week. While a handful of gig workers seem to value benefits over flexibility, AB 5 is cause for concern for those who preferred independent contractor status.

What employers can expect

The gig economy workforce isn't the only group who will feel the repercussions of AB 5. In fact, gig economy giants are the ones who truly need to prepare for disruption in California, which will likely have a negative impact on their wallets. AB 5 will force the platforms, which flew under the radar for years, to reclassify their contractors as direct employees, which isn't cheap.

When faced with inquiries about whether or not popular gig economy companies such as Grubhub and Caviar have plans to comply with AB 5 and reclassify their workforce, most platforms didn't respond.

This deafening silence could be the result of any number of reasons, including that they haven't yet figured out a loophole that would exempt them from adhering to AB 5. For instance, Uber has previously stated that while it intends to follow AB 5, the ride-sharing giant will continue its attempts to prove that it doesn't fall under the law's legal framework. While others, like DoorDash and Lyft (who have banded together with Uber to spend $90 million to lobby for alternative regulation) took on a decidedly more oppositional stance and have expressed "disappointment" as they determine how to rectify regulation with their business models.

In addition to increased labor costs, employers are now faced with compliance risks, as many race to implement processes and procedures that they had previously never gave a moment of thought to. Further, employers will soon be confronting a colossal employee turnover issue that, by design, they never considered as they had a nearly endless supply of available gig workers.

The ripple effect for gig workers

While proponents of AB 5 are quick to use labor-friendly arguments focused on paid time off, health benefits and workers compensation – which are all fantastic and worth celebrating – there are some glaring points they refuse or fail to address, namely flexibility and competition. Ask a gig worker their favorite part of this economy and one of the first words they utter will be flexibility or freedom. The ability to set one's hours and adjust from day-to-day or week-to-week is a foundational tenet of gig work, and it is one of the main reasons 35% of the U.S. workforce has sought out gig work in some form.

Another important part of the gig economy is fair and open competition, or more clearly the equation of time invested to compensation, and AB 5 muddies those waters. In fact, a federal judge just recently granted truck drivers an injunction so that they could remain exempt of AB 5, as they argue it encroaches on their interstate commerce rights. Meanwhile, California journalists have been extremely vocal about the impact AB 5 will have on their ability to earn living wages, as the new law limits a journalist to 35 submissions a year for a single publication. As the journalism industry continues to rely on freelance contribution over more expensive full-time staff, journalists are arguing AB 5 disproportionately impacts them.

With the new law not yet a month old, there remains much uncertainty on exactly what the future holds for gig workers and employers alike. What is certain though, is that we are now in a new era of human capital management, and everyone is embarking on a Darwinistic path of adaptation.

Scott Absher is co-founder and CEO of ShiftPixy.

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California's AB5 & gig work: What now?

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