Classifying Workers as Independent Contractors in California is About to Become Harder

The California Legislature is poised to pass Assembly Bill 5, an act that will reclassify up to two million California independent contractors as employees.  All indications are that the bill will pass in the coming days.  In an op-ed piece published in the Sacramento Bee on Labor Day 2019, California Governor Gavin Newsom expressed his strong support for passage of the bill:

“Reversing the trend of misclassification is a necessary and important step to improve the lives of working people. 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.”

If the bill passes final votes in the Democratic-controlled Senate, Governor Newsom likely will pass the bill into law with his signature before the Legislators adjourns on September 13th.  While AB-5 faces fierce opposition from Lyft, Uber, DoorDash and other economic powerhouses, passage of AB-5, with or without significant modifications, seems inevitable.  If passed into law, AB-5 will codify the California Supreme Court’s April 2018 Dynamex Operations West, Inc. v. Superior Court decision and fix certain problems created by the Court’s decision in Dynamex.

What Did the Dynamex Case Establish?

In the context of the rapidly expanding gig economy, the 2018 Dynamex ruling was one of the most consequential wage-related decisions in California in decades.  Although currently the new definition of “to employ” applies only to claims made under the California Industrial Welfare Commission Wage Orders, those Wage Orders reach deep into the workplace.  Wage Orders govern the classification of employees as exempt or nonexempt from overtime, the operation of alternative workweeks, minimum and overtime wage obligations, meal and rest periods, recordkeeping, uniforms and equipment, and even when employers are required to provide seats to workers.

What is the “ABC Test”?

In Dynamex the Supreme Court held that individuals engaged to perform work for others are employees unless the hiring party can demonstrate “(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.”  This is the crux of the ABC Test.

Dynamex’s Scope is Both Broad and Limited

The Dynamex decision does not address the classification of workers with respect to other kinds of employment claims, including discrimination, harassment and expense-reimbursement claims.  As it currently stands in California, then, we have two competing tests to determine whether someone is an employee or independent contractor: (1) the multi-factor, economic realities test described in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, and (2) the ABC Test for claims under the Wage Orders.

Consequently, if an individual files a lawsuit claiming unpaid minimum wages (a Wage Order claim) and unlawful discrimination (outside the Wage Orders), a jury might be asked to apply two distinct employee tests to the different claims made by the same person.  A jury might find that the individual was an employee entitled to minimum wages under the ABC Test but that the individual was not an employee entitled to protections against discrimination under the definition of “to employ” set out in Borello.  As currently drafted, AB-5 does not clearly reconcile those differences.  AB-5 would apply only to definition of “to employ” in the Labor Code, Unemployment Insurance Code and the Wage Orders.

These differences in the legal definition of the term “to employee” should be addressed by the Legislature.  But in the interim, California courts will be called upon to reconcile the different definitions of “to employ” that currently exist in the cases that come before them.  Interesting appellate decisions are sure to address these kinds of issues in the coming months.

How Will Passage of AB-5 Effect Workers and Workplaces in California?

While AB-5 current carves out significant exceptions for certain professionals, including doctors, securities broker-dealers, lawyers, architects, accountants, cosmetologists and other licensed professionals, its impact will be felt broadly across California. Passage of AB-5 will grant employment rights and protections to workers who are currently not covered by labor laws, including workers compensation insurance, unemployment benefits and sick leave.  The importance of these benefits cannot be overstated.   California’s rich labor history is filled with such moments as these, from the passage of the first minimum wage law in 1916 to the first day of 2016 when the California Equal Pay Act went into effect.  Providing greater protections to more people in the workplace in California has always been central to our identity as Californians.

However, Dynamex and AB-5, if passed into law in the coming week, will also force employers and workers to reassess their working relationships.  AB-5 would sacrifice the freedoms we associate with working as independent contractors for protections guaranteed to workers engaged as employees.  Unless the Legislature carves out an exception for Uber and Lyft drivers, ride sharing and delivery companies like DoorDash, will be forced to change their fundamental people engagement models.

As expected, employer and industry groups are decrying AB-5 as a doomsday bill that will drive business away from California and severely damage the economy.  The largest players in the gig economy have billions riding on the outcome of the legislative process.  These groups have simultaneously lobbied for exemptions and threatened to void the outcome if AB-5 is signed into law.  If AB-5 is passed, which Uber and Lyft appear now to accept as likely, they have promised to challenge the law through a 2020 voter initiative. Jointly they have earmarked $60 million to a fight to overturn the law.  Given the issues permeating discussions within the Democratic Party in the run up to the 2020 presidential election, however, a California voter initiative meant to take away employment protections granted by AB-5 would have a steep uphill fight.

The California economy is the fifth biggest in the world, just ahead of the United Kingdom, and it has weathered serious challenges over the years as worker protections have expanded and costs to businesses have increased.  California will survive and thrive, and will likely establish precedent for similar movements in other blue states.

About the Author: Patrick R. Kitchin is the founder of Kitchin Legal APC, a San Francisco, California employment law firm. He has represented tens of thousands of employees in both individual and class action cases involving violations of California and federal labor laws since founding his firm in 1999. According to retail experts and the media, his wage and hour class actions against Polo Ralph Lauren, Gap, Banana Republic, and Chico’s led to substantial changes in the retail industry’s labor practices in California. Patrick is a graduate of The University of Michigan Law School and is personally and professionally committed to the protection of workers’ rights everywhere.

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