New Jersey Exemplifies the Long, Confusing Road Ahead to Legislate the Gig Economy

The California Assembly successfully implemented its own bill, AB5, earlier this year to protect employees who are misclassified as independent contractors and denied benefits like unemployment, sick leave, and minimum wage protections. It did so by codifying a California Supreme Court ruling that used three prongs, known as the ABC test, to define whether a worker was a full-time employee or not. 

• A. The worker is free from the 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.
• B. The worker performs work that is outside the usual course of the hiring entity’s business.
• C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Plenty of corporations then threw money and time into lobbying the California Assembly to include more than 30 exceptions for specific industries into their final bill. Still unsatisfied, companies like Uber, Lyft, and Instacart have invested $100 million more into a 2020 ballot measure that would exempt rideshare and delivery drivers from the ruling. 

Here comes New Jersey 

But as goes California, so goes the nation. 

“Everyone was looking at California, labor and progressive movements, and a lot of policymakers were taking their cues from California,” explained Luke Wake, senior attorney for the National Federation of Independent Business. Now, he said, New Jersey has taken up the mantle. 

This month the New Jersey Senate and Assembly passed bills that they claimed codified into law their already existing “ABC” test for independent contractors, adopted by the New Jersey Department of Labor & Workforce Development and affirmed by the New Jersey Supreme Court. 

The only problem is that they didn’t. At least not exactly. 

The Supreme Court of New Jersey ruled on an ABC test that was a bit different than California’s:

• A.  Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
• B.  Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
• C.  Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The main difference is in the B clause. New Jersey allowed employers to classify workers as independent contractors if they either perform services outside of the usual course of business or if they work outside of the office. 

California’s Supreme Court created a much more rigid ruling, without that “or” part, making it difficult for independent contractors like doctors, journalists, or lawyers to work as freelancers. 

But instead of codifying the New Jersey ABC test, that state’s legislature instead decided to use California’s wording. They also left out those 30-plus industry specific exceptions to the rule that California included in its bill. 

“Everybody is worried,” said Laurie Ehlbeck, New Jersey director of the National Federation of Independent Business. “We have spoken to people in the legislature, the entire business community has, and they’re aware of our issues but they’re determined that this is something that’s going to happen in lame duck. Our hope right now is to encourage our members to call and tell them specifically how it’s going to hurt them and their business.”

Kevin McArdle, the communications director of the New Jersey Assembly confirmed that the number of calls he’d received about the bill had been overwhelming. He told Fortune that the Senate and Assembly now agreed that the final text of the act would need a significant amount of amending. 

“We knew the bill wasn’t perfect going in, but the testimony from Monday made it clear that there’s a lot of unintended consequences here,” he said. “Let’s take a look, let’s talk to some people and see what we can do. So that’s where we are.”

Later that night, the New Jersey Senate Democrats sent out an email to their followers explaining that they had agreed to change the bill to better reflect the intent of the New Jersey Supreme Court, and the B prong in particular. 

“The legislation is not the same as the California law,” they wrote. “The bills will not change the way freelance journalists are classified, for example; those who are classified as independent contractors will continue with that designation. The status of freelance journalists will not change.” 

The message also said that they would continue to consider additional amendments to the bill. 

Hammering it out

“The New Jersey political process is always complicated,” said Rebecca Kolins Givan, a professor of labor studies and employment relations at Rutgers University. “It always has a lot of twists and turns to it.”

Senate President Steve Sweeney told Fortune that the intent of the bill was always clear, and that he never wanted to hurt freelancers who were in business for themselves.

“When I was doing the bill, I thought this is what we need today in New Jersey,“ he said. “I think the fervor being built against these bills is largely made by large companies that want to continue to exploit workers. A true 1099 worker, we’re not doing anything to you. We’re not attacking that worker, they wound everyone up to a frenzy right now.” 

Still, Sweeney said that “we should probably have done a better job of laying out prior to implementing. I’ve been around a while, I’m the Senate president, and I know better.”  

So, what went wrong? 

“It’s a dynamic situation on the ground there,” said Wake with the National Federation of Independent Business. “This seems to be happening at a lightning pace speed in New Jersey, which I think is very concerning. There hasn’t been much opportunity for anyone to digest fully what’s going on.”

New Jersey has until January 13, its last day in session, to get something passed. 

Lessons learned 

But there’s also no doubt that the sudden rise of the gig economy has left American lawmakers with little opportunity to fully digest the impact on the economy. 

More than a quarter of Americans now rely on the gig economy to supplement their income in some manner, and one in 10 rely on it as their primary source of income. Financial volatility and access to benefits are major challenges for these so-called independent contractors, and New Jersey is not the only state trying to figure out how to ensure that large swaths of workers receive minimum wage, paid sick leave, health care, and more.

“I think the early states to pass legislation will be closely watched by other states and by these companies that are desperately hoping that they can continue to escape regulation,” said Givan. “We can expect to see this legislation under discussion in any state where Democrats have enough legislative control that they can take ownership of the issue.” 

New York, Colorado, Oregon, and Washington are actively considering similar regulations. “My guess is that other states are looking at us right now,” said New Jersey Assembly’s McArdle. 

Right now, based on the New Jersey and California models, it appears that legislators are creating a broad ruling that is then whittled down after meetings with various advocates and lobbyists. 

“A lot of negotiations went into AB5 and a lot of lobbying, and we can expect that in any state where similar bills are introduced, especially around which occupational categories are exempt and which are covered by the legislation,” said Givan. “There are a lot of businesses that believe that their ability to profit will be threatened if their workers are covered by this and so they will do everything that they can to carve out an exemption.”

Wake, who worked to make sure small business owners were exempt from AB5 agreed.

“NFIB had a principled objection to the legislator carving out winners and losers in different industries based largely on who had better lobbyists,” he said. 

While it would be much easier for businesses to operate in a climate where laws were unified across states, that’s unlikely to happen, said Givan.

“This administration is clearly not going to make any effort to codify case law definitions to protect workers to make sure that workers have basic legal rights,” she said. “The only option is to act at the state level and that means we’re going to end up with a patchwork. Companies then have to understand compliance as something that looks very different in each state, or chose which states they want to operate in.”

Brian Dolan, the CEO and founder of WorkReduce, which matches freelance advertising and marketing professionals with companies, says that he’s having trouble keeping up. “As a multi-state employer, it is an absolute pain to deal with the different regulations state-by-state,” he told Fortune. “Anything that can be done to make multi-state employment more uniform is really good for the economy and starting businesses. When you have this piece-by-piece stuff, it just makes it harder and more expensive for companies to enter the market and limits competition.” 

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