The U.S. House of Representatives recently passed the Protecting the Right to Organize Act (PRO Act). This legislation, now with the U.S. Senate, is designed to help contract workers such as Uber drivers by designating them as employees for labor negotiations and union organizing.
Loosely modeled on the disastrous California Assembly Bill 5 (AB5), this bill ostensibly is about giving independent contractors the same rights as employees when it comes to joining unions. But, the PRO Act is the first in a concerted three-part effort to reform labor, employment and tax laws by reclassifying independent contractors as employees according to what is called the “ABC test.”
The effort might be noble (expanding worker rights), but ultimately the policy is breathtaking for either its ambition or ignorance.
American dynamism depends on flexible labor, and we all will feel the costs if the ABC test becomes law. Fortunately, a similar labor law that passed this past year in Virginia offers a better model for the Senate as it considers the PRO Act.
Independent contractor versus employee
Under current law, workers are classified as employees or independent contractors according to Internal Revenue Service guidelines. Under the proposed ABC test, someone is an employee unless:
- “(A) the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
- “(B) the service is performed outside the usual course of the business of the employer; and
- “(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”
If the PRO Act is passed as written, the phrase “the usual course of business” might go down in the history of business as the phrase that tanked America.
As an example, I am a copywriter and, under the ABC test, I would be free to contract directly with certain organizations. For example, let’s say a large financial institution. It provides financial services, and I provide marketing copy. Those are separate businesses, so I would pass the ABC test as a contractor.
I would not, however, be able to contract with marketing agencies, communications firms and the like because my copywriting services fall under “the usual course of business” for such companies. Most agencies rely on freelance labor, and would have to change their business models to turn freelancers at least into part-time employees if the ABC test ever is written into employment law.
American dynamism at stake
The scope of the ABC test potentially is much, much bigger than freelancers and Uber drivers. For example, how would homebuilders hire subcontractors? How would a salon owner rent booths to hairdressers? What about real estate agents contracting with brokerages? Anyone with a business reliant on subcontractors is at risk.
When considering the nature of contract labor in America, you see our economy depends on the flexibility of our system. Contract labor allows businesses to scale up and down with demand, operating more nimbly and efficiently than if they had employees for every task.
Let’s say you ask Web Inc. to build a new website. Web Inc. might engage me as a contractor, so I would work for a few weeks on the copywriting before moving to other jobs. After I’m done, Web Inc. might engage Friendly Coder LLC to develop the site. In our current system, we all benefit from this efficient movement of contract services.
Under the ABC test, this system breaks down. Web Inc. would have to hire the developer and me as employees, which is more expensive than engaging contractors. So, what will Web Inc. do?
Money has to come from somewhere, so the only three options are to cut services (i.e., no longer offer copywriting), outsource (i.e., hire an inexpensive coder overseas) or raise prices for their clients.
The ABC test would add glue to a well-oiled system, resulting in fewer work opportunities for people like stay-at-home parents who need a flexible income option, and higher prices for people who need services that range from marketing to haircuts to home delivery.
Learn from California — and Virginia
The PRO Act draws from several pieces of state legislation. California’s “gig worker bill” AB5 required the ABC test when it passed in November 2019, but the state quickly amended the bill in 2020 because it so badly screwed up the economy for freelance workers.
This past year, the Virginia General Assembly passed a similar labor law around misclassification of workers (House Bill 984), but this law leans on IRS guidelines for classifying workers rather than the ABC test. The Virginia law is a better bill that offers worker protection without crushing the very nature of how our economy operates.
Based on people I’ve spoken with, there doesn’t seem to be much energy to take up the PRO Act in the U.S. Senate right now. Good.
But if the Senate ever does consider the PRO Act or future legislation around worker classification, it should amend it so that, like Virginia’s recent labor law, worker classification lines up with IRS guidelines rather than the ABC test.
Otherwise, American businesses — and therefore American workers and consumers — all will pay the price.
Jon Sealy is a Richmond writer. Contact him through his website at: jonsealy.com