Gig Work in California: Fueling the Classification Debate

Gig work has been the subject of intense scrutiny in recent years as an increasingly important facet of California’s business landscape. The primary debate centers on worker classification — the distinction between whether a worker is considered an employee or an independent contractor under state and federal law. Employers in California would benefit from reviewing the legal arguments and conditions surrounding gig work to ensure their compliance with the law. 

Defining Gig Work

The term “gig work” is broad in scope and subject to different definitions, according to Jennifer Shaw, an attorney at Shaw Law Group in Sacramento, Calif. “I think of gig work as sort of one-off work,” she said. 

“It is highly project-specific,” agreed Joseph Beachboard, an attorney at Beachboard Consulting Group in Torrance, Calif. Additionally, when people think of gig work, “they’re usually thinking there’s some electronic component to it, like an app or some kind of on-demand system for connecting the service provider to whoever is utilizing the service,” he added. 

This colloquial definition of gig work stems from our digital society. “I think as we’ve seen more technology,” Beachboard said, people “have become more comfortable with [technology] as a mechanism for hiring service providers,” whether for hailing a taxi or finding someone to walk their dog. This normalization has caused the gig industry in California to grow ever larger. 

California’s Gig Economy 

Shaw emphasized that the role of gig work in California’s economy is “huge” and said that “many people are supplementing their income by having a gig.” many people are supplementing their income by having a gig.” 

It is increasingly common to come across individuals who work traditional jobs and are also employed as a food delivery or ride-hailing service driver. When considering the sheer size of California’s economy as well as its population, the state probably has more gig workers than any other state, Beachboard said. 

However, the exploding popularity of gig work has raised legal concerns.

The Classification Dilemma 

The primary issue surrounding gig work is whether the workers in this sector should be classified as independent contractors or employees. There was a significant amount of dispute in the courts and legislature regarding how Uber, Instacart, and other tech companies classified their workers, Shaw said. 

The result was that in 2019, California passed Assembly Bill 5, a law that updated the guidelines for qualifying as a true independent contractor. AB 5 was a response to the proliferation of gig workers being classified as independent contractors, Shaw explained. Previously, those workers may have thought that by picking their own schedule, they qualified as independent contractors. But, as Shaw noted, the courts have argued that they are working pursuant to a company-run program, such as serving as an Uber driver, and the workers “don’t have any choice” in refusing work without the risk of being kicked off the app.

The impact of AB 5 was immediate and expansive. The bill made it “virtually impossible under the ABC test to have an independent contractor relationship,” Beachboard said. The ABC test starts with the assumption that a worker is an employee, placing the onus on the employer to prove the individual is an independent contractor. For the worker to be considered a contractor, they must meet three stringent criteria. 

The state’s motivation for passing the law is a matter of speculation. Proponents of the law have argued that it was passed to prevent the misclassification of workers, thereby ensuring that employees were not unduly cut off from traditional employee benefits such as sick leave or health care. But “if you want to take a little darker view of the Legislature,” Beachboard said, “you could say, well, because it’s a lot easier to collect taxes when the employer is withdrawing those directly from [employees’] compensation.” 

AB 5 caused instant controversy within the state. The requirements “were onerous,” Shaw said. Only a year later, in 2020, the pendulum swung the other way, when some 60% of California voters approved Proposition 22. A handful of app-based companies spent $200 million funding the initiative, expressing their opposition to AB 5. There were cost-based incentives for these companies to support the proposition, according to Beachboard. Treating an individual as a contractor means that a company does not have to provide traditional benefits associated with the employee designation, and organizations do not have to pay the employer’s portion of the employment tax.

Prop. 22 created specific AB 5 exemptions, so that for “primarily app-based industries like Lyft and Uber and things like that, it’s OK to not be able to meet the ABC test,” Beachboard said.

Prop. 22 thus allowed certain companies to classify their drivers or service providers as independent contractors. However, as part of the deal, the exempted businesses had to meet their workers halfway. Under Prop. 22, gig workers receive 120% of the minimum wage as well as health care stipends and workers’ compensation — among other benefits. 

But the law is strict in its application. “There’s a lot of stipulations that the companies have to meet” to fall under the Prop. 22 exemption, Shaw said. 

Beachboard also emphasized that the exclusions are limited in scope. It would be wrong, he said, to view Prop. 22 as a complete repudiation of AB 5. “People thought, ‘Oh, well, now you can use independent contractors again. This overturned AB 5. This did away with the ABC test.’ Well, not true.”

Employer Response to Legal Shifts 

In the aftermath, companies have had to make cost-benefit decisions. 

“They’re having to think about ‘OK, does it make sense for me to stand my ground so that I can maintain the fundamental nature of my organization?’” Shaw explained. In her view, the larger app-based companies like Uber and Instacart probably won’t make many changes. 

Such companies entirely rely on classifying people as independent contractors, Beachboard noted. “It would radically undermine their entire business model to have to take all of their drivers and start treating them as employees,” he said.

In Shaw’s view, too, the fundamental nature of the relationship between gig worker and principal has not changed. However, companies have sought to meet their workers in the middle by offering access to programs such as health care. 

“But one of the things, strategically, that these companies have to think about is: How do you describe things? You don’t call those employee benefits. You call it ‘access to health care,’” she said. “You have to be really careful that you’re not using terminology that is indicative of an employment relationship.” 

For now, Shaw said she believes that the larger gig businesses have effectively struck that balance. 

What Employers Should Do 

However, the interplay between AB 5 and Prop. 22 is complex, and the latter may have created a false sense of security. 

“Most of the folks that think they can create an independent contractor probably aren’t going to fall under the exceptions that exist in Prop. 22,” Beachboard said. 

For the majority of employers, there is a concerning amount of exposure and liability risk. Because larger employers have the resources to avoid misclassification pitfalls, it is the smaller and midsize companies that are most at risk. “They may just not realize that AB 5 exists, that it changed the standards,” he said.

To ensure compliance with the more stringent criteria under AB 5, employers need to craft a contract that reflects the requirements of the ABC test. “It comes down to being very precise,” Shaw said. 

She noted that many of the companies that employ gig workers “don’t like rules. They don’t like handbooks. They don’t like policies. But you’ve got to have them. You’ve got to spell this stuff out.” 

In California, any ambiguity will always be interpreted against the employer. And the consequences of misclassification are severe. Should an employer misclassify a worker unknowingly, they would be expected to pay any owed taxes. Willful misclassification in California can result in a $25,000 penalty and jail time. 

“I think HR people need to understand that there is a rubric for how you make [someone] a true independent contractor, and you’ve got to meet the right test,” whether that is AB 5, the ABC test, or the old Borello test, Shaw said. 

The most common situation Beachboard encounters is when employers “retain somebody as an independent contractor, who in their head starts to think they’re an employee, and when the relationship ends, they go and file for unemployment.” When the state sees this discrepancy, they may decide to conduct an audit of the employer. To prevent such a scenario, employers need to create defensible contracts and ensure that they are not blurring the lines between employee and contractor in their day-to-day business practices. 

Future of Gig Work in California 

The debate over gig work in California has settled somewhat since the passage of Prop. 22. 

“There were a lot of folks who were upset” about the ABC test, Beachboard said. But the people who were angriest were the ones who then benefited from Prop. 22. For those few but powerful players, “the squeaky wheels have been addressed,” Beachboard said.

Because the ABC test has yet to be challenged, companies not covered by Prop. 22 may protest at some point in the future. If, for example, it becomes easier to create contractors at the federal level, such a trend may rankle California businesses struggling to comply with the state’s ABC test. In Beachboard’s opinion, “the best approach would be to have a third category” called dependent contractors, which would “meet the needs of everybody,” theoretically.

In any case, the situation is unlikely to remain stable for long. “I just feel like there’s all these market forces that are coming together,” Shaw said. 

And there may be another catalyst in the form of the artificial intelligence revolution. “Everyone’s talking about how [AI affects] services, jobs, duties,” Beachboard said. “Perhaps AI is going to be the COVID-like driver of us reanalyzing what it is to work for an organization,” reviving the debate on gig work and classification. 

Rachel Zheliabovskii is a specialist, B2C Content, at SHRM.