California Governor Approves Bill that Could Upend the Gig-Economy

 

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP September 19, 2019
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​Gov. Gavin Newsom just signed a controversial bill that will make it difficult for California businesses—particularly those in the gig economy—to classify workers as independent contractors.

Labor unions and worker advocates applauded California lawmakers' decision to pass the measure. AB 5 "will expand employment protections to thousands of workers who are currently misclassified by their employers as independent contractors," according to the International Brotherhood of Teamsters.

Business groups have opposed the bill. The new law "will further diminish the Golden State's business climate and may threaten some of its biggest companies' longevity," said Sean Redmond, executive director of labor and policy for the U.S. Chamber of Commerce.

Katherine Catlos, an attorney with Kaufman Dolowich & Voluck in San Francisco, said the legislation is "a band-aid over an already complex legal analysis."

Misclassification claims are a frequent source of litigation because employees are entitled to minimum wage, overtime pay and other benefits that are not afforded to independent contractors.

The law could raise costs and administrative burdens for businesses as some workers are reclassified as employees, said Samantha Wellington, senior vice president, chief legal officer and secretary of TriNet, a Dublin, Calif.-based HR solutions provider for small businesses.

Codifying the 'ABC' Test

The bill codifies the "ABC" test, which the California Supreme Court adopted in Dynamex Operations v. Superior Court to determine whether a worker should be designated as an employee or independent contractor.

Under the three-prong test, a worker is presumed to be an employee unless the employer can show all of the following:

  • 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 of 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.

While the ABC test may appear simple, it's not, Catlos said, and for each factor there's a wealth of seemingly conflicting case law and differing public policies depending on the industry and worker at stake.

The second prong of the test is especially troublesome, Wellington noted, because it could be interpreted to mean that a business cannot use an independent contractor to do anything that the business uses employees to do—or that is otherwise central to the business. The prior test was a more flexible multifactor analysis that primarily focused on who exerted control over the work. 

Although the Dynamex decision only applies to state wage orders, AB 5 will extend the ABC test to all provisions of the California Labor Code and Unemployment Insurance Code unless another definition of "employee" is provided. So, for example, the ABC test will now apply to a labor-code claim for wrongful termination in violation of public policy.

The War Isn't Over

The bill exempts certain occupations—such as doctors, investment advisors and some direct sellers—but gig-economy workers aren't included in the exemptions. The bill's sponsor, Assemblywoman Lorena Gonzalez, D-San Diego, said she didn't want to exclude such workers from the bill's coverage. "The advent of app-based companies and the 'gig economy' has only further accelerated the practice of misclassification and resulted in declining working conditions and increased reliance on public assistance," her office said in a statement. 

[SHRM members-only online discussion platform: SHRM Connect]

Gig-economy businesses have vowed to keep fighting the measure. Ride-hailing services Uber and Lyft and delivery service DoorDash pledged to spend $90 million, if necessary, on a ballot measure to exempt their companies from the new law, according to The New York Times

Uber's chief legal officer Tony West said drivers are properly classified as independent contractors—even under the new standard. "Because we continue to believe drivers are properly classified as independent, and because we'll continue to be responsive to what the vast majority of drivers tell us they want most—flexibility—drivers will not be automatically reclassified as employees," even after Jan. 1, 2020, when the new law takes effect.

West said Uber will continue to arbitrate and litigate misclassification claims as necessary. "But we will also continue to advocate for the independence and choice that drivers tell us again and again in surveys, polls, focus groups and personal conversations that they value most."

What Now?

The ABC test attempts to simplify the misclassification question but opens the door to many other questions and nuances, Catlos said. She recommended that employers in all industries audit their contractors to determine if their workers are properly characterized as independent contractors. Franchisees, delivery drivers, housekeepers, exotic dancers, janitors and security guards have been caught up in misclassification litigation, she noted. 

If the hiring entity can't ensure a worker meets all three prongs of the ABC test, then the worker has to be classified as an employee. This test will represent a major change for all businesses in the state, Wellington said. "They'll need to update their policies and procedures and carefully scrutinize their relationships with outside vendors to ensure compliance." 

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