Employee Pay and The Truth About Gig Workers
California’s AB5 has been approved and the apocalypse is coming! Once again California is forcing companies to do things they were not willing to do on their own. In this case, the new rule provides three tests that must be passed to classify someone as an independent contractor.
(A): The worker is "free from the control and direction" of the company that hired them while they perform their work.
(B): The worker is performing work that falls "outside the hiring entity's usual course or type of business."
(C): The worker has their own independent business or trade beyond the job for which they were hired.
While this seems like a pure HR issue, it is a compensation issue. Paying employees costs more than paying contractors. It’s a fact. Companies are increasingly focused on more aggressive profit margins. The concept of “gig workers” help solve this issue by allowing companies to grow without paying things like minimum wage, overtime, benefits and other traditional components of total rewards. It has been estimated that the average Lyft and Uber employee will make about $3,600 more each year. This isn’t chump change, but it isn’t doubling anyone’s pay either.
This is a compensation issue because compensation because paying people is expensive. If you want to make more money just pay people less. By the same logic, if you want to make tons of money, just pay people nothing (and we know how that turned out.)
When the gig economy first became popular it was seen as a way for people to augment other income sources, or get paid to do jobs that would not otherwise get done. The people started working their gigs full-time and companies began slimming down the pay for these gigs. Pretty quickly taxi services started going out of business and people were complaining they no longer made enough to live in the cities they supported.
Who didn’t think this would blow up someday?
Like so many compensation-driven issues this could have been easily avoided. What if gig companies looked at their technology and business operations as the sole methods to improve efficiency and profits, rather than looking at humans to accomplish those goals? What if they had paid people (as gig workers) no less than they made in their prior work iteration? What if $3,600 for individual employees was just as important as the millions of dollars made by the early executives of these companies? What if they had shared equity more generously (as it was envisioned when it became popular decades ago?)
The opportunities to avoid this new rule were there. Companies will now spend millions fighting this new rule in court (millions they could have paid to workers.) They will spend millions of dollars reclassifying people, upgrading HRIS systems, changing payroll operations and so much more.
All of us in the compensation world should have seen this coming. We should have made a bigger effort educating executives and investors about how easy, and relatively inexpensive it would be to avoid this type of rule. I am sure there will be far more written about this in the coming months. Most of it will not discuss compensation specifically, but we will know the truth and know how to make sure it doesn’t happen again.
One note: This new law impacts ALL SORTS of workers. Janitors, Musicians, Truckdrivers, and more.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is a leading expert on incentive plan and equity compensation issues and has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.