Critics say law will exacerbate $54 billion deficit, economic downturn
California Democrats allocated $20 million in a recently passed budget to enforce a controversial labor law that some experts say has hampered the state’s economy and pandemic response.
The budget, which passed the Democrat-controlled state legislature on a party-line vote, provides $20 million to enforce Assembly Bill 5 (AB5), a law that limits employers’ ability to classify workers as independent contractors. The money is divvied up between three state agencies—the Department of Justice, Department of Industrial Relations, and Employment Development Department—to conduct audits, carry out prosecutions, and levy fines and penalties on employers. Republican assemblyman Kevin Kiley said that ramped up enforcement will only hurt businesses struggling in the wake of statewide shutdown orders tied to the coronavirus.
“That’s what the money is for, specifically—to go after small businesses and independent contractors at a time when they’re struggling more than they ever have before,” Kiley told the Washington Free Beacon.
The budget provision comes as the state faces an impending $54 billion fiscal deficit. Democratic governor Gavin Newsom revised his initial $222 billion budget proposal in May, saying that he would fund only the “most essential priorities.” The $20 million allocated to enforce AB5 survived the chopping block in the $143 billion budget passed by the assembly and state senate. Newsom, who did not respond to a request for comment, slashed education funding and said that first responders would be “the first ones to be laid off.”
The budget proposal sparked criticism from House Minority Leader Kevin McCarthy (R., Calif.), who said that the proposal will hurt his constituents. He called the multimillion-dollar allocation for enforcement “disappointing, but not at all surprising.” He criticized state leaders for misplacing their priorities and refusing to adapt to the economic challenges brought on by the pandemic.
“Gig economy workers have felt the ramifications of this legislation for months now, and the coronavirus pandemic has only made securing work that much more difficult,” he told the Free Beacon. “California’s independent contractors deserve a government that can adapt to unanticipated challenges, not one that exacerbates problems by continuing to pursue a half-baked idea.”
Democratic leadership in the state assembly and senate did not respond to requests for comment.
Newsom in April rebuffed calls from state and federal legislators, small business owners, and more than 150 economists to suspend AB5, touting the law as an example of the state’s national leadership. Under AB5, employers must meet strict requirements in order to classify their workers as independent contractors. Its 2019 passage led to widespread layoffs as businesses struggled to afford the increase in legally imposed labor costs. Experts argue that the law has made it nearly impossible for unemployed workers to take on temporary jobs from home, further exacerbating the economic downturn caused by the pandemic. More than 5.4 million Californians have filed for unemployment—more than the population of 28 states.
“You’d think at a time when we shut down small businesses for months, we’d be doing everything we can to help them out,” Kiley said. “It’s a failure to understand the need of the moment, which is to propel economic recovery, to help small businesses get back on their feet, to promote workers.”
Reallocating the $20 million set aside to enforce AB5 would hardly alleviate the state’s budget shortage—the Los Angeles Police Department alone has spent $40 million in overtime pay for officers handling ongoing Black Lives Matter protests. But according to Pacific Research Institute fellow Kerry Jackson, Newsom’s refusal to suspend AB5 has contributed greatly to the fiscal crisis, and stricter enforcement will only exacerbate the problem.
“The pandemic lockdown dried up tax revenues because so many jobs were lost. Some of the lost revenues could have been made up if those who’d been laid off had been able to work as independent contractors,” Jackson told the Free Beacon. “But the law made it illegal for them to work. So no work, no income tax revenues.”
While Monday’s budget is unlikely to be signed by Newsom in its current form, the governor’s own budget proposal also includes $20 million to enforce AB5, meaning the money is unlikely to be cut. Kiley said that Democrats’ unwillingness to budge on the law reflected the power of special interest groups in the state—AB5 was written by the AFL-CIO, the country’s largest federation of labor unions.
“Unfortunately, so far there hasn’t been any movement towards doing away with the $20 million or redirecting it somewhere else,” Kiley said. “It shows how influential these special interests are, that the governor and the legislature will not budge, no matter how strong the arguments are for doing things differently.”
Newsom has until June 30 to sign the budget into law.