The California Contagion Infecting Entrepreneurialism in America

The California Contagion Infecting Entrepreneurialism in America
Heather Coit/The News-Gazette via AP
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Political gridlock in Washington, D.C. is nothing new. While it’s frustrating for those who want to see real regulatory reforms, it offers some relief to those of us worried about Congress making new laws that would further complicate our lives. That is especially true for America’s small business community and the entrepreneurs who must navigate through a dense regulatory thicket. That said, a prolonged stalemate in Washington means we should be watching individual states more closely.


We must keep a special eye on California, which remains our nation’s leading exporter of bad and kooky ideas. Every year California lawmakers pile-on more regulatory burdens. For small business owners in California, the urge to flee must be especially high every January when a host of new laws go into effect. This year was no different. But there was one enactment in particular that is causing major headaches, and arousing attention across the country. To be sure, the most pernicious of all of California’s newly effective enactments is AB 5: A law that prohibits entrepreneurs from working as independent contractors, even if they have established themselves as a legitimate business enterprise through active marketing and incorporation. 


I’ve talked to dozens and dozens of businesses both inside California and beyond who are concerned about the impact the law has on them. For example, I’ve heard from numerous truckers who want to be allowed to continue operating as independent businesses. I’ve heard from photographers who want to continue working with beauticians and videographers who want to continue working with movie studios. And I’ve heard from businesses that refer customers to locksmiths or that work with other service providers who must now treat those workers as their own employees — even if they want to remain independent.


So, it is highly concerning to see this new California contagion spreading. Already we’ve seen bills in Oregon, Washington and New Jersey. And now legislators in other states — Colorado, New Mexico and Virginia — are considering AB 5 as a potential model. There is even a bill in Congress.


Under California’s law it doesn’t matter how little control the hiring entity exerts over the work performed, or what steps the entrepreneur has taken to establish him or herself as an independent business. The cold fact is that entrepreneurs are now prohibited from offering their services to another business if the work to be performed is “within the usual course of business” for the hiring entity. Even if they have established themselves as an LLC and or have numerous clients, if their work is viewed as essential to the hiring company’s business model the worker must be treated as an employee — which means a lot of red-tape for everyone involved. So, it is not surprising that some businesses are now cutting ties with entrepreneurs in California to avoid complications and major liabilities.


Perhaps the most frustrating aspect of this whole affair is that these legislative proposals are often talked about as “gig economy” bills, when in fact they are sweeping-up a wide array of businesses. Even with a multitude of haphazard exceptions for favored groups, California’s draconian independent contracting rules are impacting small business entrepreneurs in all sorts of industries. To illustrate the point, NFIB recently released a list of nearly 50 professions and occupations that are hurt by AB 5 — from tour guides and catering services to interior decorators and home-based construction companies.


But this is just the latest example of lawmakers using a sledgehammer where a scalpel would suffice. Even if legislators have concerns about the “gig economy,” it doesn’t make sense to impose disruptive new rules that sweep-up other industries. And we should be concerned that if the California contagion spreads to other states we will be destroying the livelihood of many individuals who currently enjoy the flexibility, freedom and higher pay that comes as a contractor.


If America is to remain a land of opportunity, where anyone with vision and drive can succeed, its vital that we reject California’s model and allow individuals to freely market their services if they so desire. Rather than further complicating independent contracting rules, lawmakers should be looking to make things easier for entrepreneurs to launch, grow and manage their own businesses. For example, states could simplify independent contracting rules by aligning their rules with the standards used by the U.S. Department of Labor or the Internal Revenue Service.


In any event, we should hope that the states will not snuff-out the entrepreneurial drive that makes America great. Sadly, that is precisely what lawmakers in California have chosen. But as this battle now shifts to other states, entrepreneurs are speaking-up in their fight for independence. And I can attest, from many conversations with affected businesses, that much is at stake.


Luke A. Wake is a senior staff attorney at the NFIB Small Business Legal Center and a chairman of the Federalist Society’s Regulatory Transparency Project.


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