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California’s AB5 – A Bump in the Road or a Brick Wall For the Gig-Economy?

Author: Robert Bernstein

September 30, 2019 10:00am

“Change is the law of life. And those who look only to the past or present are certain to miss the future.”  – John F. Kennedy

Introduction

On January 1, 2020, AB5 will be the law of the land in California. The law is codified as California Labor Code, Section 2750.3. The new law provides significant protections to workers by classifying many who were previously deemed independent contractors as employees, and by placing the burden to prove that a worker is not an employee on the employer.  The law has the potential to create major changes in the labor market, not the least of which is the disruption of the business model for many app-based, on demand service providers in what has become known as the “gig economy.”  This article provides a guide to the origin of AB5, its application, potential challenges and the law’s future.

AB5’s Genesis in the Dynamex Decision

The California Supreme Court issued its seminal labor law decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (“Dynamex”).  In the 82-page Dynamex decision, the Supreme Court evaluated existing standards for determining whether workers are deemed employees or independent contractors.  It ultimately replaced those standard allowing for a much larger group of workers under the employee category.  Significantly, the Court’s new standards created a presumption that workers are employees and shifted the burden of proving otherwise to the employer or contracting entity.  The Court also adopted the “ABC Test” (discussed below) to evaluate whether a particular worker is an employee or independent contractor.

The California Legislature enacted Assembly Bill 5 (“AB5”) that codifies the Supreme Court’s standards and tests as outlined in Dynamex.  However, AB5 creates multiple exceptions for individuals in trades and professions that would otherwise be classified as employees.  Employers generally prefer those who perform labor for compensation to be classified as independent contractors, because employees are entitled to benefits, including the minimum wage, paid sick and maternity leave, unemployment insurance, worker’s compensation insurance and contributions to the Social Security system, among others.  Studies suggest that classifying a worker as an employee can add as much as 30% to the employer’s cost compared to the same worker being an independent contractor.

AB5 clearly favors workers, by classifying many of them as employees.  Assemblywoman Lorena Gonzalez of San Diego, the bill’s sponsor, stated that:

As one of the strongest economies in the world, California is now setting the global standard for worker protections for other states and countries to follow.

California Governor Gavin Newsome signed AB5 into law on September 18, 2019.  A signing message released by the Governor stated that AB5 will:

.    .    .  help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.

The Dynamex and AB5 Standards

The Dynamex decision and AB5 apply the “ABC Test” to classify a worker as an employee or independent contractor.  The three ABC Test questions are:

  1. Does the worker perform tasks under 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?
  2. Is the work integral to the company’s business?
  3. Is the worker engaged to perform a job which does not customarily have an independently established trade, occupation, or business of the same nature as the work performed?

To establish a worker is an independent contractor and not an employee, the employer must establish that each of these questions can be answered in the negative. A presumption exists that every worker is an employee, therefore, the burden of proving otherwise is on the employer.

The California Labor Commission, Employment Development Department, and Franchise Tax Board all have authority over worker misclassification and are expected to be involved in efforts to reclassify workers, albeit mainly in individual cases.  More significant challenges to employer classifications of workers are expected to come from the California Attorney General’s Office, City Attorney Offices, and District Attorney Offices.  Private attorneys are also expected to pursue misclassification claims on behalf of workers.  Some companies, especially those who cannot afford to become involved in multiple protracted lawsuits, are already evaluating the pros and cons associated with the reclassification of workers in an effort to reduce costs linked to litigation.

Another result of AB5 involves union organizing for workers who were formerly labeled independent contractors.  Labor unions are rumored to be planning a concerted effort to unionize certain ride-share drivers once they become employees and then pursue related legislation in 2020.

Exempted Professions – And Significant Ones That Aren’t

AB5 carves out an extensive group of professions and trades from its requirements.  The exceptions were provided for groups which typically negotiate compensation rates, communicate directly with customers, and earn at least twice the minimum wage.  To determine whether a specific job or profession is exempted, the statute itself should be reviewed, because the list of exempted professions may change over time.  At this time, the list of exempted professions includes, but is not limited to: Doctors, psychologists, dentists, veterinarians, real estate agents, accountants, engineers, commercial fishermen, travel agents, graphic designers, aestheticians and even hair stylists and barbers.  Photographers, photojournalists, freelance writers, editors and newspaper cartoonists are exempted from AB5, but only if they provide 35 or fewer submissions per year.

A companion bill, AB170, provides a one-year exemption from the AB5 standards for newspaper delivery and distribution workers and was the result of a fierce lobbying effort by newspapers, many of which operate on limited budgets in the digital age. The bill exempting paper deliverers passed the legislature and is expected, as of this writing, to be signed by the Governor.

One group that is not exempted from AB5 are gig-economy workers, including those working for ride-share companies, on-demand delivery providers, and similar businesses.

Gig-Economy Responses

It is reported that companies such as Postmates, and DoorDash have been privately negotiating with labor unions, seeking agreements from the unions  to preclude  drivers and other workers from being classified as employees, in exchange for providing the drivers and workers with additional benefits.  In addition, several companies operating in the gig-economy have collectively contributed $90 million toward the creation and promotion of a California ballot measure that would permanently classify their drivers as independent contractors, notwithstanding the ABC Test and other provisions of AB5.

In addition to their negotiations with unions and the proposed ballot initiative, the large gig-economy companies continue to lobby Sacramento politicians, including the Governor.  They are reported to be seeking amendment of the AB5 statute which would protect the status of their workers as independent contractors in exchange for agreed wage and benefit increases similar to the arrangements being discussed with unions.

Takeaway

Several immediate changes are likely when AB5 becomes effective on January 1, 2020.  As businesses are compelled to reclassify groups of workers as employees and pay them legally-required benefits employers costs would then increase and would ultimately be passed on to consumers for goods and services.  Some industries, like health care, may experience a shortage of workers due to the loss of flexibility in employment that will result from the reclassification to independent contractors.

In addition, businesses which refuse to reclassify employees are likely to experience a significant number of legal challenges, both from public and private sources.  Such challenges will result in relatively prompt capitulation by small businesses, which cannot afford to fund protracted litigation.  For larger entities, including the gig-economy giants, litigation over the classification of workers is likely to occupy a small army of lawyers and many arbitrators and judges for several years.

On the national front, other states may follow California’s lead and enact similar statutes.  One such law is reported to be under consideration in New York.  Democratic presidential candidate Bernie Sanders has introduced a proposed Federal law called the Workplace Democracy Plan.   This law proposes a federal approach to worker classification similar to that in AB5.  In addition, other presidential candidates, including Elizabeth Warren, Kamala Harris, Pete Buttigieg and Julián Castro have expressed support for AB5.  Provisions in AB5 may find their way into the Democratic platform for 2020.

At the likely cost of higher prices for the public, AB5 promises to provide higher wages and enhanced benefits for many workers currently classified as independent contractors.  As the law goes into effect, legal challenges will ensure the courts become involved in interpreting and applying AB5.  Moreover, amendments to the law are likely, whether resulting from judicial decisions, effective lobbying, or practical experiences in enforcement.

We will continue to monitor AB5 and provide updates as the law changes.

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