Pro Act Would Unnecessarily Burden Early-Stage Startups
TLDR: House lawmakers are moving towards a vote on legislation that would threaten workers, startups, and larger companies alike by reclassifying many independent contractors as employees. The bill shares many concerning similarities with California’s “gig worker” law that went into effect at the beginning of the year and has drawn considerable pushback from the state’s startup community.
What’s Happening This Week: The House of Representatives is expected to vote this week on the Protecting the Right to Organize Act (H.R. 2474). The legislation, known as the PRO Act, would expand the definition of an employee in order to make it more difficult for startups and other companies to hire independent contractors to get their fledgling companies off the ground.
The movement in Congress comes after California enacted its own sweeping changes to labor laws at the beginning of the year. The state law—Assembly Bill 5—is already having a much broader impact than the law’s backers anticipated, with reports highlighting how the legislation—despite conceivably focusing on gig workers—is largely affecting non-gig industries and sectors that depend upon outside contractors and freelancers to survive and expand.
Why it Matters to Startups: The PRO Act would impact U.S. companies of all sizes, from established industry leaders to fledgling ventures. Although larger companies are better positioned to take on the financial burden of additional employee benefits and protections, an early-stage startup on a shoestring budget lacks the ability to handle the financial costs associated with an influx of employees.
The average startup launches with approximately $78,000 in capital, making entrepreneurs reliant on outside freelancers and contractors to help design, create, and market their products and services. By limiting the amount of contract work these fledgling platforms can rely upon, the law is likely to have a chilling effect on startup growth.
Of particular concern for the startup community, the PRO Act would nationalize the “ABC” test from California’s recently enacted AB 5. The PRO Act, however, would add harsher penalties and—unlike AB 5—would not contain exemptions for any occupations. The controversial state law limits the number of independent contractors and freelancers that both established firms and fledgling startups can hire.
Under the ABC test, workers are considered employees 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.” This standard makes it difficult for most workers to remain classified as contractors.
The reliance on California’s standard for the definition of employees is particularly concerning. While AB 5’s original intent was to improve benefits and working conditions for ride-sharing drivers, a number of California startups and entrepreneurs have spoken out about the wide-reaching impact of the law. As The San Diego Union-Tribune noted, the bill “affects a huge swath of smaller tech companies” and could force startups to “convert contractors to employees, or completely remake their business model and hiring practices.” Exporting similar legislation on a federal scale could have dire consequences for America’s workforce and limit the opportunity for many startups to get off the ground.
Startups in California are already fearful of how the ABC test will impact their ability to launch and grow. In a recent profile as part of Engine’s Startups Everywhere series, Laura Good—co-founder of Sacramento-based nonprofit StartupSac—called AB-5 “the biggest downer right now for startups” in the state, adding that startup ventures often rely on “contract labor and services in their early stages to get things done.”
With startups, entrepreneurs, and other organizations continuing to express serious concerns about the viability of early-stage startups as a result of California’s AB-5, it is hardly the appropriate time for federal lawmakers to ram through legislation that would codify some of the more concerning and dubious aspects of the state’s law.
On the Horizon.
The House Small Business Committee is holding a hearing at 11:30 a.m. this morning to review the Small Business Administration’s Office of Credit Risk Management.
The House Science, Space, and Technology subcommittee on research and technology is holding a hearing at 2 p.m. this afternoon on “America’s Seed Fund: A Review of SBIR and STTR.”
The House Education and Labor subcommittee on civil rights and human services is holding a hearing at 2 p.m. this afternoon on “The Future of Work: Protecting Workers’ Civil Rights in the Digital Age.”
