California’s Independent Contractor Rule Has Reduced Overall Employment In State

On March 10, a new U.S. Department of Labor (DOL) regulation that will make it more difficult for organizations to use independent contractors will take effect. The rule requires businesses to extend the benefits and protections offered to employees or individuals who no longer fit the status of a contractor, and its implementation comes as a new report shows a similar policy implemented in California is backfiring.

The California law, AB-5, set standards for when independent contractors should actually qualify as organization employees. Specifically, for a worker to be classified as an independent contractor, he or she must satisfy all prongs of a three-part test, which are:

• The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and, in fact;
• The person performs work that is outside the usual course of the hiring entity’s business; and
• The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

As the U.S. Chamber of Commerce (USCC) explains, instead of helping workers, this rule has reduced the number of self-employed individuals in the state and also has led to a decline in overall employment. Specifically, a report from the Mercatus Center found the California law led to:

• A 4.4 percent decline in overall employment;
• A 10 percent decline in self-employed workers; and
• No increase in the number of traditional employees.

“The theory behind both AB-5 and the DOL’s recently finalized regulation for classifying independent contractors or employees under the Fair Labor Standards Act is the same: by making it harder to maintain independent contractor relationships, independent contractors will be converted into traditional employees,” the USCC said. “The Mercatus study suggests this theory has failed in California. The question is whether DOL has learned anything.”

Click here to read the full Mercatus Center study. Read more from the USCC here.