HR Management & Compliance

California Bill Signals ‘Brand New Ball Game’ For Gig Economy Businesses

With details still being hashed out and the governor still in negotiations with powerhouse companies, the California Legislature has passed a bill expected to make the gig economy workforce more expensive to maintain.


Source: Stas_V / iStock / Getty Images

The legislature passed Assembly Bill (AB) 5 late September 10, a bill that largely codifies the 2018 Dynamex Operations West, Inc. v. Los Angeles County Superior Court decision. That decision made it harder to justify classifying workers as independent contractors instead of employees.

Dynamex and the new bill are putting major stress on businesses such as ride-share giants Uber and Lyft since they and other gig economy entities rely on the independent contractor model, which is a far less expensive way to staff their businesses than hiring employees who are eligible to form unions, collect benefits, and be covered under an array of state and federal laws.

AB5 is “still very much a work in progress,” Mark I. Schickman, an attorney with Freeland Cooper & Foreman LLP in San Francisco and an editor of California Employment Law Letter, said the morning after the bill passed. The state assembly and senate versions aren’t identical, and Governor Gavin Newsom said he was still in negotiations with Uber, Lyft, and other companies.

AB5’s new test for determining employee status is based on a strict “ABC” test outlined in the Dynamex decision. Before Dynamex, businesses could use the less restrictive Borello test.

Although the bill will make it harder to justify an independent contractor classification for many businesses, it contains “a ton of exemptions” scheduled to roll out through 2023, Schickman says. For example, newspaper delivery people and workers in a hodgepodge of other industries will be able to meet a less stringent test to remain independent contractors.

Employers Need to Take a Careful Look

“Employers will have to look at the bill once it’s reconciled and signed and see what’s in there,” Schickman says, adding that Uber and Lyft “did tons of things to satisfy the Borello test,” such as making sure their drivers could set their own schedules, but they won’t be able to meet the tougher Dynamex test. “Because driving is inherent to the business, they’re dead in the water under Dynamex.

Passage of AB5 “creates a brand-new ball game” related to independent contractors, Schickman says. Once it’s finalized, employers will have to look carefully at how the new statute will affect their workforce. Almost every workforce in the state will be affected in some way, he says.

Dynamex and Borello Tests

The Dynamex test presumes workers should be classified as employees unless a company can prove three factors:

(A)      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 work and in fact;

(B)      The worker performs work that is outside the usual course of the hiring entity’s business; and

(C)      The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The less stringent Borello test sets out a multitier group of factors that don’t all have to be met and generally are easier for companies to meet.

Ballot Initiative Possible

The new statute affects more than just wage and hour issues, Schickman says. Since it broadens the definition of employee, many more workers will come under laws such as Title VII of the Civil Rights Act of 1964 and other antidiscrimination laws as well as the National Labor Relations Act. Also, the state’s sexual harassment training requirements will cover workers who must be classified as employees under the new statute.

Both the federal and state governments have focused on misclassification of employees as independent contractors for the past decade, Schickman says, and California law includes a penalty for misclassification in addition to other potential liability. For example, a California employer faces liability for misclassification in addition to liability for not paying for workers’ compensation insurance and unemployment insurance on workers determined to be employees.

The legislature must finish its work before it adjourns on September 13. The governor has indicated he will sign the bill even as he remained in negotiations with gig economy companies. Even after the bill is signed, the issue may not be over since Uber and Lyft have put resources behind a possible ballot initiative to allow them to keep their independent contractor model.

Can’t get enough of California workplace policies, state-specific updates, and best practices? Attend: HR Comply California, in Los Angeles, CA on October 7-9, 2019. Cathleen Yonahara, Esq., Freeland Cooper & Foreman LLP will be presenting a session on the interaction between state and federal laws: On the Record: Inside Look at How the Latest California and Federal HR Laws, Court Rulings and Regulations Impact Recordkeeping and Workplace Policies. Click here to learn more, or to register today!

Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR Web and print publications.