Our Nancy Grover reports this morning that the California Senate is preparing to vote on the controversial legislation AB5, and that the bill now has the governors support. AB5 is designed to essentially codify last year’s Dynamex decision, where the California Supreme Court dramatically limited the definition and acceptable use of independent contractors. While many assume this is just another one of California’s unique political issues, it really is the starting salvo in what will be a much bigger nationwide discussion; and as is so often the case, it is a discussion that started with the advent of new technologies.
As Grover reports, the California Supreme Court ruling in 2018 “established a new test to determine whether a worker should be designated as an employee or independent contractor under California law.” The “ABC test” shifts the presumption to one of automatic employment for any worker. It is up to an employer to prove that a specific worker is not an employee, and for that the worker must meet all three of the following three qualifiers:
- 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.
Many on both sides of the aisle were left wanting from the Dynamex decision. Businesses who routinely use independent contractors for intermittent or occasional work within the state found the new test draconian in nature. Those seeking to expand protections for workers were not happy that it only addressed minimum wage and overtime pay. It did not address further protections such as workers’ compensation and other benefits; although, presumably, persons reclassified as employees would be entitled to have similar benefits to other employees already in place.
The state, through AB5, is attempting to clarify and legislatively establish the intent of the Dynamex decision. Lobbyists have been extraordinarily busy on this one, as many business sectors have been anxiously working to have their specific class of traditionally independent contractors exempted from this new law. Those successful in obtaining that exempt status include doctors, lawyers, architects, engineers, accountants, insurance agents, realtors, hairstylists, freelance journalists, financial brokers, dentists, podiatrists, psychologists, travel agents, payment processing agents, photographers, editors and commercial fishermen.
It is notable that several sectors that serve the workers’ compensation industry, including transportation, translation and interpretation workers as well as court reporters are not exempt in AB5. The second tenet of the ABC test established by the court in the Dynamex decision seems to me to be the biggest hurdle for these companies. Requiring that the worker must perform tasks that are outside of the usual course of the hiring entity’s business automatically challenges the independent contractor status for these companies. Many use independents who specifically specialize in areas that are the usual course of the hiring entity’s business; the need for their services is simply inconsistent or erratic in many areas of the state. Dynamex and AB5 creates real challenges for some of these businesses.
You will note that transportation drivers who service ride sharing organizations such as Uber and Lyft were not included in the exemption list. That is not a surprise since it is the gig, or sharing economy, that has driven this issue to the forefront. Uber and Lyft have announced a well-funded effort to overturn AB5 at the ballot box should it become law. They say it would dramatically alter their business models, and they are right. AB5 has the potential to decimate the ride-sharing industry in California and return us to the days of stagnant and uninspiring competition in the personal transportation realm. Forcing these companies to classify all drivers as employees will simply mean that the most productive drivers will remain, and all of the part-time and ancillary drivers will no longer exist.
There has long been debate over the use of independent contractors, but the technology behind these sharing systems is rapidly revolutionizing the way employment is undertaken and defined. It is forcing courts and legislatures to address nagging (and lagging) benefit and protection issues, and we are having to redefine what actual employment may be. Many view California’s AB5 as the defining result of that battle, but they would be wrong. AB5 is not the end of the story. It is simply the opening salvo in a much more protracted struggle that the country must eventually endure.