With the passage of California’s controversial Assembly Bill 5 in 2019, Governor Gavin Newsom (D) and Golden State legislators enacted the first state law in the U.S. to regulate freelance workers as full-time employees, with the result being lost income and fewer job opportunities for California-based freelancers and independent contractors. In a late night tweet on May 26, former Vice President Joe Biden stated his support for Assembly Bill 5 and his opposition to the proposed ballot measure backed by Uber and Lyft that would partially repeal it.
This is not the only new California law Biden recently endorsed. In addition to supporting AB 5, the former Vice President has also come out in favor of the measure on the November ballot that would raise taxes by an estimated $12 billion annually, doing so by eliminating Proposition 13’s property tax cap for commercial properties.
Following California’s bad example, in February congressional Democrats subsequently introduced and passed the PRO Act, a federal version of AB 5. The PRO Act would take AB 5, along with all of its adverse consequences for workers, national. If Democrats hold the House, while capturing control of the Senate and the White House this November, there is a good chance AB 5 effectively becomes law of the land nationwide with the enactment of the PRO Act.
PRO Act opponents point out that worker rights are undermined by the bill’s federal gutting of state Right to Work laws, which protect workers from being forced to join and funnel money to union bosses as a condition of employment. This Right-to-Work-killing provision makes the PRO Act dead on arrival in the Senate so long as Republicans are in charge. When reporting on the PRO Act’s House passage in February, the Washington Post inaccurately described state Right to Work laws, which are effectively nullified by the PRO Act, as “passed in predominantly red states, which allow employees to be exempt from paying fees to unions that represent them.”
Right to Work laws simply give workers the freedom to decide whether or not they would like to join and pay dues to a union. In the 23 states without Right to Work laws, workers can be forced to join and fund a union as a condition of employment. This is not so in the majority of states with Right to Work on the books. It’s a bit Orwellian for a reporter to portray a federal undermining of these Right to Work laws as “pro-worker,” as the Washington Post did. However it’s just plain wrong when the Washington Post asserts that Right to Work protections are exclusive to red states. Of the 27 states with Right to Work laws, the most recently enacted ones are found in the famous “Blue Wall” states that President Donald Trump broke through on his path to the White House: Michigan (2012) and Wisconsin (2015).
The timing of Joe Biden’s endorsement of AB 5 was noteworthy, not because it was sent in the middle of the night but because it came only six days after the bill’s sponsor, Assemblywoman Lorena Gonzalez (D-San Diego), admitted during a May committee hearing that “she was wrong” to believe her bill would not cause freelancers to lose work. Whether AB 5 will remain on the books, at least in its current form, remains to be seen. Uber, Lyft, Instacart, and DoorDash are supporting a November ballot measure that would exempt app-based drivers from AB 5, clarifying those workers are independent contractors.
“When AB 5 took effect in California on January 1, we didn’t see hundreds of companies convert independent contractors into employees,” reports Kim Kavin, a freelance writer who is a member of the American Society of Journalists and Authors, which sued the state of California over AB 5. “Instead, thousands of independent contractors lost work they loved, sometimes ending up without any income at all”
California Regulators Penalize New Business Model
In addition to forcing workers into a classification that they don’t desire and that would not benefit them, California officials are also pushing businesses into a classification that they do not want. Just as California officials have taken action to treat freelancers as full-time workers, Sacramento bureaucrats have successfully sought to a regulate non-franchise operator as though they are. In March, California regulators fined that company, OYO, more than $200,000 for allegedly operating franchises in California without proper state approval.
OYO is a company founded in 2014 that partners with small hotels, typically those without access to the capital and economies of scale enjoyed by large franchises. OYO offers partnering hotels proprietary technology and marketing help in order to draw more customers and increase profits. Since the company’s founding in India more than five years ago, OYO has rapidly grown to become the world’s second largest hotel chain, operating in 80 countries.
In addition to the punitive action taken against OYO by California regulators, government officials in the state of Washington sent OYO a cease and desist order earlier this year. Washington state regulators accused OYO of having made offers to more than 30 hotel owners or managers without necessary state registration. As in California, Washington state officials assert that OYO should be registered and regulated as a franchise operator. OYO has since reached an agreement with Washington officials, but is appealing the California ruling.
The state regulatory hiccups encountered by OYO this year were featured in an April 23 article in Forbes. It was reported in that article that the CEO of OYO “had left out one key piece of information” when he pitched his company at a 2019 conference in San Diego. The alleged omission is that “Oyo wasn’t approved to operate franchise businesses in California.”
However OYO officials contend that this fact, which is the crux of the dispute with California regulators, is immaterial. That’s because OYO does not consider itself to be a franchise and is making the legal case against a franchise classification in its appeal.
“OYO believes that our innovative business model does not qualify as a franchise at all,” Abhinav Sinha, the company’s Group Chief Operating Officer, wrote in a May 2 blog post. In that post, Sinha makes the case that OYO is not operating as a franchise:
“In our business model, the facility owner is not required to make any required payment to OYO. OYO makes initial capex investment, provides a sign-on bonus, has the right to collect and book revenue and makes payment to the hotel as per a pre-agreed formula. The money flow is not from the owner to OYO. But as we control the revenue management and collection, we distribute and share revenues with the hotel as part of a reconciliation process.”
OYO leaders do not consider the business to be a hotel franchising company, but rather a hospitality and technology firm. However, as a result of the California ruling, OYO is now moving forward as a traditional franchise operator in order to continue doing business in the Golden State. OYO now operates in 37 states and is looking to expand to others, where the company is going to find regulatory climates far more hospitable than California’s. As OYO broadens its U.S. footprint, the company will try to convince state regulators to “create sandboxes that enable innovative approaches to business.”
The legislative attack on independent contractors and freelancers in state capitals and Congress, like the regulatory hurdles OYO encountered in California and Washington State, are harmful to businesses and present costly barriers to market entry. Large C corporations can manage these costs, while their smaller competitors are put at a disadvantage. These developments, unfortunately for small businesses with limited resources, are not surprising and are nothing new. These are just the latest examples documenting how intrusive and aggressive state regulation have made government and public affairs budgets, not just legal assistance, an essential cost of doing business in many parts of the U.S.