Coronavirus Fuels Debate over California’s Independent-Contractor Rule

 

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Coronavirus concerns have raised questions about California's strict independent-contractor test and whether it should be amended. Although gig workers and other independent contractors have access to some federal emergency relief, they generally aren't entitled to unemployment compensation and other benefits provided to employees.

So far, the federal government has allocated about $3 trillion in economic relief to businesses and workers as they struggle to make ends meet during the coronavirus pandemic. "While the Coronavirus Aid, Relief, and Economic Security (CARES) Act has created some additional protections for independent contractors, those measures are temporary and unlikely to stem the well-entrenched skepticism of independent-contractor arrangements by California lawmakers," said Jason Morris, an attorney with Newmeyer Dillion in Newport Beach, Calif.

California lawmakers passed AB 5 to provide workplace protections to more people by requiring businesses to reclassify many independent contractors as employees. Though AB 5 targets on-demand workers like drivers for ride-hailing and delivery services, other independent contractors such as freelance journalists and truck drivers are covered by the law. Several business and trade groups have filed lawsuits arguing that the law is too restrictive for workers who prefer to be independent.

"The dramatic economic fallout caused by the COVID‑19 pandemic likely will further polarize competing views of AB 5 and its expansion of the so-called ABC test," Morris said.

Many businesses and industry associations, as well as some workers who value the flexibility and autonomy of independent-contractor relationships, will continue seeking to narrow the application of AB 5 through legislation, ballot measures and litigation, Morris predicted. Other workers and worker-advocacy groups that value the legal protections triggered when a worker qualifies as an employee, he said, will continue seeking to expand the application of AB 5.

The 'ABC Test'

Effective Jan. 1, AB 5 codified a 2018 California Supreme Court decision that created a three-pronged test, called the "ABC test," to determine whether a worker should be classified as an employee or independent contractor.

The test used prior to the ABC test was a multifactor analysis that primarily focused on who exerted control over the work. But under the ABC test, all three of the following factors must be met for a worker to be properly classified as an independent contractor:

  • The worker is free from the 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.
  • The worker performs tasks that are outside the usual course of the hiring entity's business.
  • 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.

The second prong is the most problematic, said Myrna Maysonet, an attorney with Greenspoon Marder in Orlando, Fla. Under prong B, a plumber hired by a law firm to fix a sink would be an independent contractor, but a plumbing company would likely have a problem hiring a plumber as an independent contractor, even if the worker used his or her own tools and worked for other businesses.

"It's an antiquated perception of the employment relationship," Maysonet said. "We need more flexibility and people want control.

"People need to be able to work, and I think [lawmakers] will have to come up with a hybrid test that's a little more realistic than this," she added.

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For now, AB 5 continues to be the law of the land, Morris noted. "Companies that have not already done so should examine their independent-contractor classifications and take steps to mitigate the risk of an adverse classification finding."

Misclassification cases can be crippling, he noted, especially when nonexempt employees are owed minimum wage, missed meal and rest periods, unpaid overtime and unreimbursed business expenses. Employers can also be on the hook for record-keeping violations, steep penalties, attorney fees and even criminal liability.

Potential Amendments

While AB 5 provides exceptions from the ABC test's application, the criteria to qualify for those exceptions are difficult to meet, according to Morris, and many businesses that are counting on fitting into one of the exceptions may be disappointed to find they do not.

Even before COVID‑19 hit, legislators, union leaders, business groups and other key stakeholders were discussing potential amendments to AB 5. "Now the calls for both amending AB 5 and for strictly enforcing its provisions against employers will echo even louder," said Matthew Costello, an attorney with Haynes and Boone in Orange County, Calif. "In other words, both sides of the AB 5 debate are weaponizing COVID‑19 as a reason justifying their respective stances."

An alliance led by the Music Artists Coalition recently announced that an agreement had been reached on a music-industry exemption to the law. This amendment ensures that the classification of musicians and other recording artists as employees will be controlled under the more flexible test rather than the stricter ABC test, Costello explained.

Several other industry groups, such as those representing freelancers and truck drivers, have challenged AB 5, and Costello expects this trend to continue as more businesses feel the pressure of AB 5's impact during the coronavirus crisis.

"However," he said, "whether the pandemic will have a long-term impact on worker classification issues depends on so many unknowns, such as how long the pandemic endures and the timing and strength of the economic rebound."

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