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Thursday, June 27, 2019

How the Gig Economy Can Save a Generation Drowning in Student Debt⁠—If We Let It

If California lawmakers are not careful, they could soon regulate the gig economy out of existence.

Photo by Tom Cochereau on Unsplash

When Guenevere Garrido got accepted into UCLA, she knew it was an opportunity she couldn’t turn down, even if she wasn’t sure how she was going to pay her tuition. Like 44 million other Americans, she made the decision to take out student loans and borrowed $40,000 to pay for her college education.

Majoring in child development, Garrido’s first job after graduation was working in a preschool where she made $13 an hour. While she eventually made a career switch into a higher paying job, no matter how much her paycheck increased, she was still being strangled by debt.

Flexible Side Jobs Empower

Combined with accrued interest and other outstanding debt, Garrido soon found herself $68,000 in the hole. Realizing she needed supplementary income to dig herself out, Garrido decided to start driving for Uber and the rideshare company SideCar. Since both companies let drivers set their own hours, Garrido was able to drive nights and on the weekends without it interfering with her full-time job. In July 2016, just three years after she began participating in the gig economy, Garrido made her very last student loan payment. In 2018, she became 100 percent debt free.

Garrido credits that second income with changing her life. The additional money allowed her to pay down her loan and taught her life skills she didn’t even know she needed. She described no longer feeling helpless, but empowered.

“There were times when I made a payment of $3,000 at once. It was always about preparation,” she told NBC News.

It definitely gave me the discipline and the focus and the hustle to do it, because I was more focused on my money and making that extra income. It made me more conscious. That first year gave me the muscle to really be disciplined to pay off the rest of my loans.

As of now, the average student loan debt is pushing $40,000. To make matters worse, more than one out of every ten people are delinquent on their monthly payments. Fortunately, the gig economy has offered a lifeline to a generation of college graduates crippled by student loan debt and eager to break free of their financial chains.

A Growing Gig Economy

According to the Bureau of Labor Statistics, in 2017, 55 million people, or more than 35 percent of the US workforce, were participants in the gig economy. By 2020, that number is expected to jump to 43 percent. Yet, instead of praising the gig economy for creating so many opportunities for Americans, many insist that these workers are being treated unfairly and need to be made full-status employees, completely disregarding why this sector is so appealing to so many.

California legislators are currently considering a bill which, if signed into law, will majorly disrupt the gig economy. Assembly Bill 5 (AB 5), would effectively change the employment status of hundreds of thousands of freelance workers within the state from independent contractors to full-status employees, placing new financial burdens on employers and threatening the livelihood of the entire gig economy and its participants.

If they are not careful, the entire gig economy may soon be regulated out of existence.

The bill passed the State Assembly—the state’s lower house—at the end of May by a vote of 53-11 and will now need to be approved by the California State Senate before reaching Governor Gavin Newsom’s desk. AB 5 comes in response to labor rights activists pushing for rideshare companies like Uber, Lyft—as well as other gig economy participants like DoorDash and TaskRabbit—to give its contractors the same employment rights as are granted to regular employees.

“Every worker in California deserves to earn a living wage, benefits, and to be able to join together with their co-workers so they can set standards for their jobs,” Doug Bloch, political director at the local chapter of the Teamsters union in California, told Politico.

While these labor activists might be filled with good intentions, they are failing to understand, or at least recognize, why so many people—consumers and contractors alike—were drawn to the sharing economy in the first place. And if they are not careful, the entire gig economy may soon be regulated out of existence.

Don’t Make the Gig Economy Something That It Isn’t

The steep rise of the gig economy over the last decade has ushered in a whole new era of job opportunities for Americans. For those looking to supplement their income, moonlighting as an Uber driver is a great way to earn extra money quickly. For artists or writers looking to build their careers, many might work full-time jobs during the day and then take on “gigs” working hourly or at a per-piece rate. And with the number of Digital Nomads increasing, taking “gigs” as opposed to traditional employment has allowed many young people to travel and live life on the go, rather than staying strapped to one place.

In addition to a quick onboarding process that allows participants to begin earning money within a week of signing up, the gig economy allows the flexibility of having a part-time job and access to additional income whenever you feel like it with few strings attached.

The gig economy’s contractor model has helped keep freelancers and transitioning workers on their feet during times of personal financial crises.

And in exchange for this flexibility, those who participate as contractors forgo the benefits typically given to full-status payroll employees, like health insurance or vacation pay.

This is how the gig economy works, and it is what has made it so attractive to so many (see graph above). In choosing to participate in the gig economy, contractors understand what it is they are signing up for and what they are sacrificing. By not having to request time off or make sure you haven’t used too many of your vacation days, you have made the choice that you value your freedom over the security of a job with benefits and health care. This is about subjective value and personal choice, not oppression or exploitation.

And, while California lawmakers and labor activists might not want to admit it, in many cases the gig economy’s contractor model has been precisely what has helped keep freelancers and transitioning workers on their feet during times of personal financial crises.

A Path to a Decent Living

A few years ago, Moises Abrego abruptly lost his job. He was fortunate enough to quickly find a position selling insurance, but since that profession relied heavily on commission, he was still struggling to make ends meet as he built up a client base. Abrego needed supplemental income quickly if he was going to be able to make his mortgage payment and prevent a foreclosure on his home—a concern that kept him awake at night.

After a friend told him about Uber, Abrego decided to give it a try. Since Uber is contractor-based, he didn’t have to go through a lengthy interview process or wait weeks for an answer from a prospective employer. Instead, he was able to start making money almost immediately.

A New Jersey resident at the time, he found that he could make about $800 a week staying local or about $2,000 if he was willing to drive into the city. With this additional income, Abrego was able to generate enough money to keep his house and pay his bills.

Thornberg writes that “the idea these people are being exploited and need help just doesn’t fly.”

“There are many others out there who are struggling. Do not hinder our opportunity to get those jobs,” Abrego said. “Uber is providing a good means for people to make a decent living and support their families.”

By turning contractors like Abrego into full-status employees, the California legislature is threatening to hinder the growth of the burgeoning sector and potentially spell the end of the gig economy. As economist Chris Thornberg points out, these legislators fundamentally misunderstand the appeal of gig work.

“California’s economy has the lowest unemployment rate it has ever had. People have options, and they’re still choosing to drive Uber or Lyft,” Thornberg writes. “The idea these people are being exploited and need help just doesn’t fly.”

What Makes Someone an Employee?

At the heart of this new proposed legislation rests the pressing question of what makes someone a full-status employee versus a contractor. In 2018, the California Supreme Court handed down its ruling in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The ruling, now known as the “Dynamex decision,” dealt with the employment status issue of contracted delivery drivers and instituted the “ABC test” as a means of determining whether or not a person is an employee or a contractor. The ABC test sets specify:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

It is estimated that the California state government loses about $7 billion annually from the alleged misclassification of employees.

The new bill gives legal teeth to the Dynamex decision by setting forth legislation that would mandate that companies use the ABC test to determine the tax and employment status of each worker. While passed off as a giant leap forward for workers rights, this bill is really a means for the government to get its hands on more money.

It is estimated that the California state government loses about $7 billion annually from the alleged misclassification of employees. By forcing employers to categorize more of their workers as full-status employees, the state hopes to increase its tax revenue. Yet, even with revenue serving as an obvious incentive for government officials, this hasn’t stopped labor activists from jumping on board and making this an issue of employee rights—something it most certainly is not. And if the bill is approved, which is likely given California’s political climate, the economic repercussions will be felt in sectors beyond just the gig economy alone.

The Economic Consequences: Not Just the Gig Economy

In addition to the contractors suffering from the passage of AB 5, companies themselves will suffer tremendous losses. If gig economy “employers” are forced to pay for their contractors benefits and higher pay, many will be unable to financially stay afloat. And without Uber in business, you cannot have Uber drivers. And without these jobs, which in 2015 accounted for 160,000 for Uber alone, many would find themselves suddenly without a previously relied upon income.

But Uber and others in the gig economy are hardly alone in fearing what these employment status changes may do to its financial livelihood. Independent contractors can be found in almost every industry, and in California, a state dominated by the entertainment sector, Hollywood is expected to suffer huge losses.

From actors to makeup artists and everything in between, Hollywood is comprised of many independent contractors and thrives as a result. If instead of this gig model, the entertainment industry is forced to take on additional costs in order to treat each contractor as an employee, the whole sector could be threatened.

Thornberg predicts that if AB 5 is signed into law, many film and television productions would be forced to either leave the state or find a way to cut costs elsewhere. “The reaction is typically lower base pay,” he says.If California wants to protect workers and foster a thriving economy, it should allow people to make their employment decisions independent of state action. “For the industry to shake out, ultimately people are going to get more in the way of benefits, more in the way of comfort, and less in the way of take-home pay.”

And Hollywood is not the only ally of the gig economy when it comes to the new legislation. Already, several other industries have come forward asking for exemptions from the bill, including: doctors, dentists, lawyers, architects, insurance agents, accountants, engineers, financial advisers, real estate agents, and hairstylists who rent booths at salons.

Unions can yell about worker rights until they are blue in the face, but at the end of the day, the people who should be involved in determining a “worker’s” status is the company and the individual performing the work. If a contractor wants to be a full-status employee, he or she can decline contract work and find a job where this is possible.

Legislators should also not be too hasty in altering the employment status of gig economy workers unless they want to bear the responsibility of rendering the sector completely nonexistent in the process. If California wants to protect the rights of its contractors and help foster a thriving economy, it should allow people like Moises Abrego and Guenevere Garrido to make their employment decisions independent of state action.

  • Brittany is a writer for the Pacific Legal Foundation. She is a co-host of “The Way The World Works,” a Tuttle Twins podcast for families.