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New Bill May be Retirement Kiss of Death for Gig Economy

new bill limits rideshare drivers from solo 401(k)
3 Minute Read

The Solo 401(k) is a unique retirement plan specifically designed for one person and is ideal for individuals within the gig economy who cannot participate in a work-sponsored retirement plan. But there’s a new bill in town that may prove to be a game changer for independent contractors in certain professions. 

New Bill Has Rideshare Companies in an Uproar

California recently passed a new bill, which is receiving a lot of pushback from app-based services that built a business model around the inexpensive labor they generate from contractors. 

The controversial bill, Assembly Bill 5 (AB 5) was passed on Wednesday, September 10 and will require that certain companies hire workers as employees rather than independent contractors. As an employee, workers will receive basic labor rights such as labor protection, employee benefits and the ability to form a union. Many professions were excluded from the bill, including financial advisers, dentists and doctors, but ridesharing companies did not receive an exemption.

Assembly Bill 5 and Companies that Hire Independent Contractors

Perhaps the most vocal companies against Assembly Bill 5 are ridesharing giants, Uber and Lyft.

The reclassification will force ridesharing companies, such as Uber and Lyft to spend money they otherwise wouldn’t spend on independent contractors, such as benefits, certain taxes and the guarantee of minimum wages to tens of thousands of drivers. If the bill is put into law, ridesharing companies, like Uber, have stated they will be compliant. Until that time, Uber and other companies will continue to push against the bill, as the company has expressed that Uber drivers fall outside of the company’s “usual course” of business. 

Tony West, Uber’s chief legal officer spoke to reporters in a phone call stating that, “Several previous rulings have found that drivers’ work is outside the usual course of Uber’s business…serving as a technology platform for several different types of digital marketplaces.” 

West went on to say that, if the bill becomes law, it will be a real game changer within the industry, and will impact how drivers interact with the platform. He believes these changes will be less than welcoming among Uber drivers. Other changes include when drivers can start and stop accepting rides. Additionally, the popular ridesharing company, Lyft released a notice to its drivers, informing that they may not be allowed to work for more than one ridesharing company at a time. 

Rideshare Drivers on the Fence Over Bill

Despite the negative impact drivers may face from ridesharing companies if the bill becomes law, many drivers are for AB 5. 

As an employee, drivers will receive many benefits, such as paid time off and access to most employee benefits. However, not all drivers are pleased with the changes to come. 

In a USA Today article, Lyft driver Jermaine Brown says he is advocating against bill AB 5, as it could disrupt the main reason he became a driver: flexible hours that allow him to spend more time with his family. 

“The opposite side says I can still get a flexible schedule, but I don’t believe that,” Brown said in an interview. “If this passes it will be detrimental to me and to my family. It is not why I signed up for Lyft.” 

Solo 401(k) Plan for Independent Contractors 

When it comes to saving for retirement, independent contractors may not be allowed to participate in a work-sponsored retirement plan, but they can establish a Solo 401(k) plan. The Solo 401(k) allows Americans to save for retirement in a tax-advantaged environment, much like the traditional 401(k), but without high administration fees. 

Additional features of the Solo 401(k) include the ability to reach a higher maximum contribution, take out a $50,000 loan, invest in alternative and traditional assets among other favorable components. 

Here’s the catch:

In order to be eligible to establish a Solo 401(k) plan, participants must be: 

  1. Small business owners with no full-time employees, excluding themselves, a spouse or business partner(s) 
  2. An individual who generates some form of self-employment income, such as independent contractors 

If AB 5 becomes law, not only will it impact the flexible schedule that attracted many drivers to the job, it will exclude them from establishing a Solo 401(k) retirement plan as they will no longer be classified as independent contractors.

The bill will limit some gig economy participants from the Solo 401(k), a robust retirement plan that has better features than a work-sponsored retirement plan. The future remains uncertain for rideshare drivers. On Wednesday, the bill passed by a vote of 56-15 and now heads to the state Assembly where the new bill may be the retirement kiss of death for participants within the gig economy. 

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