I realize that many of you sole proprietors are always busy and have many duties, but your livelihood may have changed by the time you finish reading this month’s article. The reason I say that is because I have to write these articles in advance. So, here I am, in the middle of September, writing this, and you won’t be reading it for a few more weeks, but no one knows what might be happening to the independent contractor in California between now and then.
The bill, known as AB 5, expands a groundbreaking California Supreme Court decision last year back in April of 2018 known as the Dynamex decision. The ruling and the bill instruct businesses to use the so-called “ABC” test to figure out whether a worker is an employee or not. If you have not heard of this, you must be hiding under a rock! It will affect anyone who currently works as an independent contractor. Remember, California is an at-will state, which means that an employer can terminate you for any reason, at any time of the employment, with or without reason. However, an at-will employee does have a right not to be terminated for reasons that are illegal under state and federal law.
California is in the final stretch of its bid to regulate the gig economy, defined as a labor market characterized by the prevalence of short-term contracts or freelance workers, as opposed to permanent jobs (using independent contractors). On August 30, the state’s Senate Appropriations Committee cleared Assembly Bill 5, moving it a crucial step closer to becoming state law. It is now widely expected that the bill, known as AB 5, will most likely pass a full Senate vote before the legislative session ends on September 13 and be signed by governor Gavin Newsom. The bill would likely force many “gig companies” and trucking companies to reclassify their independent contractors as employees, pulling the foundation of the gig economy out from under it.
Newsom had kept his cards close to the vest on AB 5, but on September 2 – Labor Day in the US – he publicly declared his support for the bill in an article to the Sacramento Bee. “Reversing the trend of misclassification is a necessary and important step to improve the lives of working people,” Newsom wrote. “That’s why, this Labor Day, I am proud to be supporting Assembly Bill 5, which extends critical labor protections to more workers by curbing misclassification.”
AB 5 would codify the test for determining whether a worker is a contractor or an employee that was outlined by California’s supreme court last year in its Dynamex decision. The court instructed firms to apply a standard commonly referred to as the “ABC” test, which says a worker is “properly considered” an independent contractor to whom certain wage and hour regulations don’t apply only if: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.
So, you say, “Why should I worry about Uber and Lyft drivers or DoorDash couriers and others?” Because this AB 5 will affect the status of every independent contractor in California. You may be forced to become employee drivers subject to the California at-will laws. You will not be able to set your own schedules and enjoy a degree of flexibility uncommon in many employee positions.
It’s harder to argue both sides on the “B” part of the issue. Right now, independent contractor drivers DO NOT perform work “outside the usual course of the hiring entity’s business.” It seems pretty clear that drivers drive, and driving is essential to the “usual course” of the trucking business. As far as the “C” part of the standard, for independent contractors to stay independent they will have to establish a clear and separate business. This means getting incorporated, getting their own FMCSA authority, their own liability and cargo insurance, and more.
The huge unanswered question is what happens if AB 5 is passed and signed into law. It’s one thing to talk about reclassifying hundreds of thousands of workers, but another to actually do it. Presumably, there would be a lot of paperwork. In addition to having to deal with payroll taxes and workers compensation and minimum wage and other things like that, there’s also the very real question of how many workers these companies could actually sustain once employee-related costs get added into the equation. The uncertainty of it all is also rattling investors. After Newsom endorsed AB 5, certain stock prices, already trading well below their IPO prices, sunk to fresh lows. Not a good sign.
In a research note published September 5, analysts at Morgan Stanley said they expect the ride-hail giants Uber and Lyft to fight AB 5 if it passes with lobbying and litigation, delaying enforcement of the proposed law and “any material fundamental impact” from the bill until 2021. If and when that impact occurs, the analysts said they fully expect the trucking companies to pass the bulk of these increased costs along to consumers, leading to higher prices in merchandise of all kinds. Another great job, government!
If AB 5 becomes law, that could anger gig workers who find themselves out of jobs, so to speak, if the platforms they depend on tighten their work requirements and offer fewer work slots. Any ballot initiative companies like Uber and Lyft end up pursuing will likely attempt to portray AB 5 as a misguided policy choice that hurts workers more than it helps them, and that punishes consumers with higher prices, in hopes of swinging voters to their side and gaining an exemption from the legislation. Stay tuned!
