If you have eyes and ears (and if you don’t, how are you reading this), you’ll know all about the gig economy. Some people say it’s the way of the future, some people say it’s just exploitative, others position themselves in the middle. I’m guessing you’re sick of hearing about it. As someone who lives in San Francisco, a mass producer of startups that rely on gig workers because their innovation is ‘thing that exists but we provide it by breaking labor laws,’ you’ll get no sympathy from me. Especially now that AB5 is set to dominate Californian headlines for the next… forever.
What’s AB5? you might ask…
Simply put, it’s a bill that came into effect on January 1st, reclassifying around one million workers state-wide from independent contractors to employees entitled to sick time, paid family leave, and health insurance, as well as guaranteed minimum wage and other benefits afforded to regular workers.
Assembly Bill 5 was voted in with a clear majority by both the State Senate (29-11) and the Assembly (56-15), and it’s not hard to understand why. The gig economy is controversial, with tech darlings Uber and Lyft regularly being accused of abusive business practices, and as the wealthiest U.S. state, it’s in California’s best interest to be seen addressing the issue, especially with the homelessness and child poverty issues that keep plaguing us. Trying to solve economic problems? That’s how we do down in Commiefornia.
The law determines who qualifies as an independent contractor with the “ABC test,” by which the person has to meet the following criteria:
- Absolute freedom from 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.
- Boy it’s great to perform work that is outside the usual course of business of the employer.
- Customary engagement in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
(the original conditions didn’t actually start with A, B, and C, so I’ve altered the wording slightly to make it fit. You’re welcome)
Now, under these principles, a real estate agent is not classified as an independent contractor. The IRS considers them “statutory nonemployees,” as long as they’re licensed, compensated by their sales rather than the hours they work, and have an agreement with their agency not to be treated as an employee for federal tax purposes. This isn’t unique to California; more than half of U.S. states have an exception from workers’ compensation laws, due to the profession’s “unique nature,” as the National Association of Realtors puts it. Some businesses got AB5 exceptions because their independent contractors were able to negotiate their own prices, directly communicate with customers, and earn at least twice the minimum wage, and most (hopefully all) of those apply to real estate agents, too.
Still, some people are worried about the effect the law might have, with one headline even proclaiming that AB5 eliminates real estate agents. While this is a little (little) alarmist, it’s reasonable to be a little concerned about the impact the law might have on other states – and, in the long run, California itself. If agencies had to class their agents as full time employees, change their income model, and provide all the expected benefits, they might have to tighten their belts and say goodbye to part time and lower performing agents. With similar proposals being considered in Oregon, Washington, and New York, brokerage firms and agents alike would do well to seriously consider the situation.