California’s #AB5 independent-contractor law goes into effect today. Unfortunately, there’s a lot of FUD and misinformation floating around about the law; even the usually excellent New York Times published a story yesterday full of incorrect assertions. I’d like to set the record straight by dispelling five of the most common myths about AB5.
Myth #1: Freelancers can’t work flexibly any more.
This is the biggest fear that freelancers have about AB5, and it’s just not true. You can still work lots of short gigs, or a few longer gigs. You can work for one company or many companies. You can work a few hours or a lot of hours.
Depending on the nature of the work you do, the mechanics of how you invoice and get paid may have to change a bit. But that doesn’t mean you can’t keep working as flexibly as you want.
Myth #2: “Employee” means “full time” or “long term”
People have certain impressions about what it means to be an employee — specifically, that employees work full time for one company. Freelancers, consultants, and contractors in many cases don’t want that kind of work, which is why they contract. But here’s the thing: “employee” is a legal status that has (almost) nothing to do with how many hours you work each week or how many weeks you work.
As an employee, you can work as few or as many hours as you and your employer agree. You can also be an employee of more than one company; as many as you want actually, either one after the other or all at the same time.
Myth #3: Being an employee for a short gig is difficult
It doesn’t need to be. The Times article quotes a freelancer who asks, “Who’s going to hire me as an employee for three assignments a month?” That question is based on the mistaken idea that employment has to be a “heavyweight” process with a lot of complexity.
In fact, employment can be very lightweight (meaning easy to start and end), making it practical for even short assignments. The easiest way is to use an “employer of record” service — there are many out there, but I’ll use the example of GreenLight, one that I happen to be associated with. An employer of record (EoR) is an intermediary that employs contractors on behalf of companies for short-term or longer-term assignments. GreenLight can get a freelancer signed up as a “lightweight employee” in about 10 minutes, automate her invoicing and receivables, and get her paid 5–10 days after invoice, all while protecting the employer from legal risk.
An EoR service isn’t the only way though. Companies can also streamline their own employment processes to make it easier to employ for short duration, and some do.
Myth #4: Costs are dramatically higher
There’s a bit of complexity here, which makes this area especially prone to misunderstanding, but the net is this: for most companies and freelancers, the economics of employment vs contracting are not terribly different.
The biggest change in moving from contractor status to employee status is in how payroll taxes get paid. In the US, about 15% of gross pay goes to Social Security and Medicare. How that amount is paid differs for contractors vs employees. A contractor pays the full 15% at the end of the year as “self-employment tax,” while an employee has 7.5% deducted from every paycheck and another 7.5% paid by the employer directly to the government.
Suppose you’re a business, and you engage a contractor who works 5 hours at $40/hour. You’ll write a $200 check, of which the contractor will owe $30 in payroll taxes, for a net of $170. If the same person worked as an employee, you’d pay out a total of $215 — $200 to the worker and $15 to the government — and there would be a $15 FICA deduction on the worker’s check, for a net of $185 to the worker.
Now if you do it exactly that way, then of course your costs have increased by 7.5%, but the worker’s net has increased by the same amount. It’s just a raise (or ‘zero-sum,’ to use a technical term). To keep the original economics, you would change the employee’s rate to $37/hour—that gets you back to $170 net for the worker and $200 spend for the employer.
There are other economic differences between employment and contracting. Some are also zero-sum, like the cost of various types of insurance. Others are true net costs. At the end of the day, it costs 5% to 10% more to deliver the same take-home pay to an employee vs a contractor. That’s not nothing, but for most businesses it’s manageable.
Myth #5: AB5 is a California thing
This particular law is certainly only applicable in California, but every state has independent-contractor laws, and a lot of businesses are violating them without knowing it. This has been going on for a long time. Way back in 1999, Microsoft paid out about $100 million to a group of “independent contractors” who the court said were actually employees. Twenty years ago. Not in California.
More recently, New Jersey fined Uber $649 million over the same issue.
The AB5 law, and opposition from Uber in particular, have brought a lot of press to this issue right now, but it’s not new and it’s not localized to one state. The Employer of Record services I mentioned above arose after the Microsoft case, and these days all large companies, and many smaller ones, either use them or roll their own. They would rather spend 5% to 10% predictably than take a risk on a huge fine down the road.
AB5 scares people because it’s new and because it’s not well understood. It’s also being portrayed as worse than it is, because a few big companies like Uber have a vested interest in it being portrayed that way. Being compliant will take a little effort, and there will be a modest cost, but the sky is not falling, and flexible work is not dead. There may be a short-term blip as businesses adapt, but after that blip, flexible work will continue to grow.