If you do not live in California, you might not have heard of Assembly Bill 5 (AB 5). However, if you are a so-called gig worker, you should be paying close attention. The bill, which went into effect this month, may impact thousands of self-employed individuals and could have a devastating effect on many new and popular technology companies, such as Uber, Lyft and Grubhub. Moreover, several states, including New York and New Jersey, may look to introduce similar legislation in the coming year(s). Here, I want to discuss the bill and the impacts it will have on the growing gig economy and its participants — and how it affects your retirement planning.
What Is Assembly Bill 5?
AB 5 is the first piece of legislation looking to reclassify gig workers as employees. The companies most affected by this bill are ride-sharing kings Uber and Lyft, along with delivery services, such as DoorDash. What is unclear is whether other self-employed individual will be affected. These include truck drivers, entertainers, freelance writers and other contractors. What is known is that high-salaried professionals, like doctors and lawyers, are exempt from the bill.
Those who created the bill say it’s a much needed change for independent workers, especially with the growth in the gig economy. Gig economy workers are independent contractors paid for a specific gig (task), such as a ride to a destination, as opposed to those workers who receive a salary or hourly wage (W-2 employees). As W-2 employees of a company, they would be entitled to receive a minimum wage, overtime considerations and paid sick time. However, along with the extra benefits would come many drawbacks for some. The biggest one is flexibility. Independent contractors can set their own hours. Once you are classified as an employee, you may lose the ability to work when you want. In fact, the very definition of an employee is whether their employer has a “right to direct and control” the employee’s work, even if that right is not exercised.
Of course, employers are not happy with the new law either. This will affect their bottom line. The costs associated with an employee are generally more than those of hiring an independent contractor. Those costs will inevitably be passed onto the consumer. Potentially, some companies may end up closing shop.
In addition, it is possible that many gig economy workers could lose their jobs because of the costs involved in converting gig workers to employees. This actually occurred in the home healthcare sector in 2015, when a new law was passed in California requiring home health caregivers receive overtime.
How About Retirement Planning?
What few people are talking about are the impacts AB 5 may have on your ability to save for retirement. Anyone with earned income can open an individual retirement account, or IRA. However, with low annual contribution limits, one can only save up to $6,000 in 2020 ($7,000 if they are age 50 or older) annually. While that’s a good start, it may not be enough, especially for older savers.
Before AB 5, California gig workers could go above and beyond what a typical IRA can offer. By utilizing a Solo 401(k) or SEP IRA, they could contribute nearly 10 times that what an IRA allows. The one caveat to these plans is the presence of self-employed income. Independent contractors work for themselves and thus earn self-employed income. Once AB 5 goes into effect, many will no longer have this type of income if they become employees and are not eligible to adopt a Solo 401(k) or SEP IRA.
Certainly, many companies will offer retirement plan options as a way to entice contractors to stay on as employees. However, the maximum amount one can contribute to an employer 401(k) plan is much lower than a Solo 401(k) plan, because of the costs involved in offering employer profit sharing contributions to all employees. Not only can you contribute more to a Solo 401(k), but fees are kept to a minimum, and you have an almost unlimited investment list. You can borrow up to $50,000 and opt for a Roth, and you also get to choose the provider.
What Does The Future Hold?
While there are certainly lots of benefits to AB 5, there are plenty of drawbacks, as well. The question remains if the pros of being an employee outweigh the cons. Many former 9-to-5 workers left the corporate world to enjoy the freedom and flexibility to work for themselves. Further, retirement planning is an important consideration when deciding what to do once the bill goes into effect.
No one knows the far-reaching impact of this legislation yet. You can count on many gig economy employers and independent contractors alike pushing back against this bill. In fact, Lyft and Uber have announced a ballot initiative to combat the bill. In the end, AB 5 may end up offering some gig economy participants more benefits, but it could also drastically reduce the earnings potential and flexibility options for tens of thousands of Californians, including reducing their ability to maximize their retirement savings.
