On September 10, 2019 AB5 passed the Senate and Assembly, and Gov. Gavin Newsom has indicated he will sign it. Effective January 1, 2020, this California legislation will impede companies from claiming workers are independent contractors.
AB5 codifies, clarifies and grants exemptions to a 2018 California Supreme Court decision called Dynamex. Both AB5 and Dynamex make it harder for companies to label workers as independent contractors. They use an “ABC” test that says workers are employees if:
(A) they perform tasks under a company’s control,
(B) their work is integral to the company’s business, and
(C) they do not have independent enterprises in that trade.
If they don’t meet all three of the conditions above, then they have to be classified as employees.
The “ABC test,” is a much clearer — and stricter — standard of proof than the vague guidelines under federal law and certainly sets a higher bar for companies to demonstrate that independent contractors are indeed independent. Under the three-part test noted above, arguably the highest bar is that a company must prove that contractors are doing work “outside the usual course” of its business. It is one of the biggest challenges yet to the profit models of many gig employers that rely on a small army of independent contractors who will likely have to reclassify tens of thousands of contractors in California as employees.
If companies like Uber, Lyft, DoorDash and other gig companies are forced to reclassify their employees, it would change everything. These workers would get labor protections and benefits that all employees get, such as unemployment insurance, health care subsidies, paid parental leave, overtime pay, workers’ compensation, paid rest breaks, and a guaranteed minimum hourly wage. And, perhaps more importantly, they could unionize. Unions want to organize Uber and Lyft drivers and others. Expect to see a bill introduced in 2020 allowing gig workers to unionize.
The added cost of these benefits is why gig companies are so desperate for a compromise and continue to argue that their workers qualify as independent contractors even under the new stricter test in AB5.
Uber proposed new progressive framework that included establishing a guaranteed minimum earnings standard that would provide stability for drivers while allowing them the flexibility to earn more, and work whenever, wherever and for whomever they choose; bringing drivers access to robust portable benefits like sick leave and injury protection; and real sectoral bargaining, giving drivers a voice in the decisions that affect their livelihoods, which they believe would be a first for the modern economy. Tony West, Uber’s Chief Legal Officer, said he “was disappointed that we were not able to reach a compromise” and he believes that “California is missing a real opportunity to lead the nation by improving the quality, security and dignity of independent work.” Tony also cites that “We will continue advocating for a compromise agreement, and we were encouraged by Governor Newsom’s comments as reported by the Wall Street Journal this morning, that he’s fully committed to negotiating a solution. But we are also pursuing several legal and political options, including working with Lyft and other Internet platform companies to lay the groundwork for a statewide ballot initiative in 2020.” (https://www.uber.com/newsroom/ab5-update/) Uber and Lyft will be funding a ballot to ask voters to approve the creation of a new category for ride-hail drivers.
There are exemptions from AB5. Dozens of professions (doctors, psychologists, dentists, podiatrists, insurance agents, stock brokers, lawyers, accountants, engineers, veterinarians, direct sellers, real estate agents, hairstylists and barbers, aestheticians, commercial fishermen, marketing professionals, travel agents, graphic designers, grant writers, fine artists, enrolled agents, payment processing agents, repossession agents and human resources administrators) won exemptions to AB5, usually on the grounds that they set or negotiate their own rates, communicate directly with customers, and make at least twice minimum wage. There are exceptions for photographers, photojournalists, freelance writers, editors or newspaper cartoonists who make 35 or fewer submissions a year, as well as for some types of business-to-business activities.
For individual cases, the Labor Commissioner’s Office, the Employment Development Department and the Franchise Tax Board, have authority over workers misclassification and will be enforcing AB5. For larger changes, expect to see a rash of lawsuits, both from the private bar and from public attorneys. AB5 empowers the attorney general, city attorneys in large cities, and local prosecutors to sue companies over violations. The city attorneys of San Francisco and Los Angeles both appear ready to act on this. It would take a judge’s order to force Uber and Lyft to reclassify — and it’s likely they’d fight their cases for years.
To determine how to properly classify a worker, make sure to consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties. If you are looking for assistance with classifying your employees contact Rothmeyer Rothmeyer today.