Are Your Workers Misclassified?
California Assembly Bill 5 (or AB-5, for short) went into effect on January 1, 2020, brining with it one of California’s most controversial pieces of employment legislation in California history — and one that will significantly impact many industries across California.
AB-5 originates from a California Supreme Court ruling in 2018 called the “Dynamex Decision.” The purpose of the law is to regulate the worker classification of companies that hire large numbers of workers, especially gig workers. AB-5 reclassifies independent contractors as employees, carrying the same, rights, obligations, and benefits as any employee protected under California law.
AB-5 moved on from the traditional “Borello” test in favor of the “ABC Test” to determine whether workers are contractors or employees:
A: “Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?”
B: “Does the worker perform work outside the usual course of the hiring entity’s business?”
C: “Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?”
The “A” factor regards the “right” of the employer to control the employee.
The “B” factor requires an examination of whether the employee performs his or her job distinctly independent from the usual course of business conducted by the employer. The “B” factor analyzes the comparative nature of roles performed by businesses and workers.
The “C” factor looks at what usual steps were taken to establish and promote each independent contractors’ independent business—for example, through incorporation, licensure, advertisements, and/or routine offerings to provide the services of the independent business to the public, or to a number of potential customers.
But here’s the kicker: AB-5 presumes that all workers are employees. It is up to the employer to disprove the status of worker as an employee by applying the ABC Test. Employers must satisfy all three elements of the test to succeed, or be subject to wage and hour laws (overtime, meal breaks, rest breaks, etc.), worker’s compensation, paid sick days, disability insurance, and employee benefits, just to name a few.
A Blow to Gig Employers
On August 10, 2020, in a pivotal win for workers, Superior Court Judge Ethan Schulman granted the state a preliminary injunction to make Uber and Lyft reclassify California drivers as employees. Judge Shulman found that the state has a strong argument that the workers are not independent contractors under AB-5.
Judge Schulman found Uber and Lyft stumbled on the “B” element of the test – the companies could not prove workers’ duties are outside the employer’s regular business. Simply, defendants’ drivers do not perform work which is ‘outside the usual course’ of defendants’ businesses. Judge Shulman stayed the order for 10 days to allow the companies time to appeal, as they had requested.
Lyft argued drivers do not want to be employees. Uber also argued the vast majority of drivers want to work independently.
Judge Schulman appeared to agree with the state’s legal argument for treating the drivers as employees, but struggled with the ramifications of ordering the companies to reclassify hundreds of thousands of drivers. Judge Schulman acknowledged the change in classification will not only be costly for the companies, but also have an adverse effect on drivers who want to continue their “side hustle.”
“Hail Mary” Proposition 22
Uber, Lyft and a handful of other gig economy companies have mounted a campaign to put the question of gig workers’ status to a statewide vote through a ballot initiative known as Proposition 22, which could exempt them from A.B. 5.
Proposition 22 would allow companies to treat their workers as independent contractors while codifying some traditional employment benefits for gig workers, such as an earnings floor and insurance against on-the-job injuries. Prop 22’s failure would mean Uber and Lyft must abide by A.B. 5, precluding them from treating California drivers as independent contractors — the appeal notwithstanding.
The companies have pledged upward of $100 million combined to support the initiative, which will appear on the Nov. 3 ballot. The California Labor Federation, a statewide union coalition, is leading the opposition. How the battle shakes out in this climate is hard to forecast.
To the extent A.B. 5 still applies to the gig economy on Nov. 4, Judge Schulman’s order will stand as a landmark application of California law. The ruling will set precedent for other industries looking to challenge AB-5’s widespread application. Though most state wage laws and the federal Fair Labor Standards Act determine status based on the extent of an alleged employer’s control over a given worker, not the type of work performed, the landmark ruling by Judge Schulman is California’s first major step towards classifying gig worker’s as employees following AB-5’s passage.
Employers that utilize independent contractors should continue to evaluate the applicability of the ABC test on a case-by-case basis. For questions on employment related matters, please contact Kyle R. Maland, Esq. at email@example.com.