What is California’s New AB5 Law and How Will it Affect the Gig Economy?

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What is California’s New AB5 Law, and How Will it Affect Employees & Employers Within the Gig Economy?

What is California’s New AB5 Law, and How Will it Affect Employees & Employers Within the Gig Economy?

Sep 30, 2019

To call California’s new AB5 bill (which falls under Section 2750.3 of California Labor Code) a groundbreaking piece of legislation would not be an overstatement. As California Governor, Gavin Newsom, signed Assembly Bill 5 into law on September 18th, the standard for determining whether workers should be classified as employees or independent contractors was, in effect, dramatically altered. Taking effect on January 1, 2020, AB5 is further clarification of California’s 2018 Supreme Court case, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles (4 Cal.5th 903).

The Dynamex case held that there is a general presumption that most workers are indeed employees, and should be classified as such. It placed the burden of proof for hiring entities to classify individuals as independent contractors under what is known as the three-part AB5 ABC test. The ruling and the newly signed bill require businesses to use the ABC test in determining whether a worker is an employee or an independent contractor.

Under the ABC test, for a worker to be classified as an independent contractor a hiring entity must first prove the following:

(A) The worker is free from the control and direction of the hirer in connection with the performance of the work, practically and in the contractual agreement between the parties.

(B) The worker performs work that is outside the usual course of the hiring entity’s business.

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity/company.

This amounts to a more straightforward, and stricter, standard of proof for companies than what many employment lawyers agree were vague guidelines within federal law. For most companies, meeting all of the above standards set forth in the ABC test will be challenging. And two of the most prominent companies that will be impacted considerably by AB5 are Uber and Lyft.

Despite an expensive and aggressive lobbying campaign, Uber and Lyft were not found eligible to be exempt (though they vow to fight the decision, and it should be noted that although other states such as New York are considering similar legislation, California is the first state to actually pass a bill into law). Lyft, Uber, and DoorDash have responded by contributing $30 million apiece in an effort to fund a November ballot initiative that would overturn AB5.

As AB5 is brand new, and many employment lawyers and scholars feel that there are currently more questions than answers available regarding the interpretation and ultimate application of the law, it’s important to keep in mind that much could change before the first day of 2020. However, as the law stands now, it has some major implications for a large number of California workers. Approximately 400,000 Californians work for traditional gig platforms like Uber and Lyft. Additionally, nearly 1.5 million freelance workers in California could also be covered under the new law.¨

What AB5 means for workers who would be newly classified as employees:

The nearly 2 million aforementioned California workers will now be provided with basic labor rights, a first time occurrence for Uber and Lyft drivers. Under AB5, employees are now entitled to benefits including:

  • A minimum wage
  • Workers’ compensation
  • Unemployment insurance
  • Expense reimbursement
  • Paid sick leave and paid family leave
  • Opportunity to join a union

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Additionally, employers must pay half of each employees’ Social Security tax after the bill takes effect.

But the bill’s impact on companies such as Uber and Lyft doesn’t end there.

With both companies recently going public upon launching initial public offerings (IPOs), their annual profit reports are now opened up to scrutiny. Of late the media has focused on the fact that both companies are currently hemorrhaging losses. According to a recent Barclays analysis, classifying all California drivers as employees could cost Uber $500 million a year. Moreover, it could Lyft $290 million a year. Those additional costs, combined with consistent financial losses, are indicative of why both Uber and Lyft are pushing back so forcefully against the AB5 law.

As for an alternative proposal from either of the ride-share companies, The San Francisco Chronicle reported earlier this month that both companies “want to create a new category of workers called network drivers.” Those who would be considered network drivers would maintain their status as independent contractors. However, they would be eligible to receive an earnings guarantee as well some unspecified “benefits,” and are promised to be provided with a unified voice to communicate with company management. Uber’s proposal includes an earnings floor of 1.27 times minimum wage (calculated as a weekly average), as well as 30 cents-a-mile for miscellaneous expenses. Similarly, Lyft has proposed a $21 an hour wage, which would include any additional expenses. Both options would apply only from the time a driver accepted a ride request until that ride concluded. In turn, it would not cover what is know as “deadhead” waiting time.

But Uber and Lyft drivers are certainly not the only workers who will be affected by the passage of AB5. In fact, in actuality the law could primarily affect non-gig workers. And for some, there is a grey area that can be viewed as open for interpretation as to whether they are covered under AB5.

One example that demonstrates the potential for interpretation could be Costco. Apart from selling retail goods such as garage doors, Costco also offers services including installation for such products. Not only can you buy your new garage door there, but you can also contract a worker through Costco’s services to install the new purchase at your home. Given that installation workers are not as consistently utilized by the company when compared to full-time, in-store workers, there’s room for debate over whether or not those installation workers should now be considered Costco employees under AB5. And there are multiple examples of various types of companies who could find themselves with similar scenarios that are equally unclear.

Trucking companies, newspaper publishers, and cleaning operations could be among the types of companies most significantly impacted by the new law. In today’s economy a number of conventional U.S. businesses have modified their practices to classify most workers as independent contractors in an effort to reduce labor costs. But labor/employment law experts contend that this trend means companies now frequently misclassify workers who should be considered employees instead as independent contractors to evade the costs involved in having to provide expensive benefits such as health care, paid vacation, sick time, retirement plans, and unemployment insurance.

As an example, if a writer is periodically contracted by an out-of-town newspaper outlet to cover local stories in their area, that doesn’t automatically necessitate that the writer owns her own business and, as such, should be classified as a bona fide independent contractor.

However, the bill is said to mandate that companies sending out workers to provide various services to a potential array of clientele — such as truck driving companies who send their drivers out for deliveries to any number of varying clients, and cleaning companies that send their workers to locations such as restaurants or other public venues — will no longer be able to defend as a legal premise that those specific jobs are an example of the workers running their personally owned companies.

Examples of AB5 exemptions:

While Uber and Lyft were unsuccessful at demonstrating a case for why they should be exempt, dozens of professions were successful in winning exemptions to AB5. What tended to separate these exempt professions from others such as ride share drivers was:

  • Whether or not the workers had the wherewithal to set or negotiate their own rates
  • Whether they had access to direct communication with customers
  • Whether they earned at least twice the minimum wage

Examples of those exempt professions, primarily of the white-collar variety, include psychologists, doctors, dentists, insurance agents, podiatrists, 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. There are also some exceptions pertaining to photographers, photojournalists, freelance writers, editors, as well as for some types of business-to-business dealings.

Many employment lawyers feel that, as it was passed mere days ago, the AB5 law carries a degree of uncertainty and a lack of overall comprehension of its ramifications (both immediate and long-term) for many workers. There appears to be an overall consensus that workers who could be affected by the law, and find themselves newly validated as company employees in 2020, should consult a labor lawyer to ensure they have a full understanding of how the law will affect them in their specific jobs. Moreover, and perhaps most important, employment lawyers and experts suggest that workers should remain vigilant and continue to monitor the situation as it unfolds.

If Uber and Lyft do indeed defy the AB5 ruling, as they have emphatically stated they plan to, workers could suddenly find themselves in need of a consultation with an experienced labor law firm that can ensure that each individual receives the benefits they are afforded under the new law.

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Go See Sam