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California’s AB 5: An End to the “Gig Economy” in California?

Author: Amanda Fornwalt

December 9, 2019 10:00am

On January 1, 2020, California’s sweeping employment legislation, Assembly Bill 5 (“AB 5”), which codifies the much reviled 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles takes effect. The Dynamex decision turned California’s longstanding analysis of worker’s relationships with companies on its head. Since 1989, the State of California applied the “right to control” test proscribed in Borello & Sons, Inc. v. Dept. of Industrial Relations, wherein the question of “employee” versus “independent contractor” was answered primarily by evaluating the degree of control a worker maintained in determining the time and manner in which he or she performed the work. Various secondary factors were also taken into account to determine whether the worker was more likely than not to be able to control the manner and means of their work. Beginning January 1, 2020, following the lead of the Dynamex court, AB 5 now requires application of the “ABC” test for determining the nature of the relationship between workers and companies. Under the “ABC” test, a hiring party must establish all of the following conditions for a worker to be considered an independent contractor rather than an employee:

  1. The individual is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  2. The service performed is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

The legislation was originally intended as a protective measure to avoid misclassification of employees as independent contractors by employers seeking to game the system to avoid paying employer taxes and providing state and federally mandated benefits such as health and unemployment insurance. However, as is often the case, despite the best of intentions, California’s plans may well go awry.

Various industries rely on independent contractors throughout the nation and now risk complete upending with the implementation of the new law. By way of example, California’s salon and gym industries are heavily reliant on independent contractor models. Hairstylists and personal trainers often prefer independent contractor relationships because it affords them flexibility and the ability to move facilities and maintain their client base. California’s thriving indie music scene is also at risk. Prior to implementation of AB 5, bars, restaurants, coffee houses, and clubs could enlist varying musicians to perform in their establishments and pay the performers on a contract basis. With the January 1, 2020 implementation of AB 5, however, any establishment regularly enlisting live entertainers as part of their business model will have to hire such performers as employees. As a result, these venues will likely hire in-house performers as their standard entertainers rather than contracting varying bands or artists to perform from week-to-week. New musicians will thereby likely struggle to gain exposure or book shows to perform. The interstate trucking industry will also feel the impact of AB 5. Currently, over 70,000 out-of-state truckers, acting as independent contractors, are deployed to the ports in California to pick up and transport goods throughout the country. Under the new law, these truckers will not be allowed to operate as independent contractors and the likely result will be refusal by many trucking companies to dispatch their drivers into California for fear of running afoul of California’s new law. The ensuing shortage of drivers will have reverberating effects throughout the country.

Takeaway

AB 5 will likely have ramifications on a variety of different industries reliant on independent contractors. As is always the case, employers will eventually update their business models to accommodate the new law, but there are bound to be some growing pains in the meantime. One thing is certain: 2020 is poised to be a rocky year while industries adjust to AB 5’s implementation.

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