AB5 Set to Have a Large, Yet Largely Unknown, Impact on California’s Booming “Gig Economy”

September 26, 2023

AB5 Set to Have a Large, Yet Largely Unknown, Impact on California’s Booming “Gig Economy”

On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (“AB5”) into law, which has gone into effect as of January 1, 2020.  The law is commonly referred to as the “Gig Law” because of its impact on the so-called “Gig Economy” which has developed over the past decade or so—thanks in large part to Silicon Valley innovations which have led to the creation of new, pay-per-task “gigs” like ridesharing and app-based home delivery. The law’s intent is to provide a relatively easy-to-follow “test” for whether workers can be classified as employees or independent contractors. It is expected to radically change the business models of companies like Lyft, Uber, DoorDash and Postmates, amongst many others. Before getting into the potential impacts of the law, it is important to understand how we got here.

Employee or IC?

Without getting too deep into worker classification, it is important to understand the difference between an Employee and an Independent Contractor (“IC”) in the eyes of the law. In short, an Employee is afforded many more “benefits” than an IC, such as being guaranteed a minimum wage, sick leave, protection from harassment, overtime, rest breaks, and other state employment protections. As one can imagine, providing these benefits to workers costs employers a lot of money.  From that perspective, it is in any company’s best interest to utilize as much IC labor as they can. But employers have long been restricted from classifying Employees as ICs when it is not appropriate.

The Borello Test

From around 1989 until 2018, the way a court would determine whether a worker was improperly classified as an IC was through the 9-part test outlined in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (the “Borello Test”). The centerpiece of the Borello Test was whether an employer “has the right to control the manner and means of accomplishing the result desired.” In other words, can your employer tell you how you must do your job? Can they tell you to arrive at the office/worksite on Monday at 9 a.m.? Can they tell you what you must be wearing, what tools to use, what processes to follow, when you can take a break, when you can leave? If the answer to these questions is “Yes,” then you are undoubtedly your employer’s Employee. By contrast, if your employer merely tells you what job needs to be done and allows you to do it at your discretion, with your own tools, with expertise you acquired elsewhere, you are likely an IC.

Under this test, companies like Uber spent years arguing that they did not control the manner and means by which their drivers did their work. Uber argued that they merely provided a platform for people to use their cars for profit, and the drivers “took it from there.” Uber even went so far as to argue that their business was not ride-sharing, but rather that they were just a “technology company” with a stake in the ride-share industry. Drivers argued that they were still subject to Uber’s extensive rules and regulations, which made them Employees. The Borello Test did not provide clear answers, but there were interesting arguments on both sides. Then came the simplified Dynamex test.

The Dynamex Test Changes the Key Question

In 2018, the California Supreme Court took up the case of Dynamex Operations West, Inc. v. Los Angeles County Superior Court and fundamentally changed the metric of worker classification. The Dynamex Test begins with the presumption that all workers in California are Employees. It is then up to an employer to prove that their workers are actually ICs. To do so, an employer must show that properly classified ICs are: 1) free from employer control, 2) working outside the regular scope of the employer’s business, and 3) independently established in their own trade. For example, if you are a grocery store owner, it is easy to prove that an electrician you hired to service your store is an IC. The electrician is: 1) likely to do their work outside your control, 2) not performing tasks that are related to selling groceries, and 3) an established tradesperson who can offer his or her service to any other business. By contrast, if the electrician starts working for the store bagging groceries on a full or part-time basis, he or she will have to be reclassified as an Employee.

Under the Dynamex test, ride-share app companies have a much harder time proving that their drivers are ICs. Are courts likely to believe that Uber and Lyft are not in the business of ridesharing? Are courts likely to believe that once they start their shifts, drivers can “do things their own way,” free from the company’s control? Are courts likely to believe that these “gig” workers are established professional drivers? The answer is: likely not.

AB5 Adapts the Dynamex Test as State Law

As stated above, AB5 went into effect at the beginning of 2020—and in its first month of release faced a Los Angeles Superior Court Court ruling that the law was in conflict with federal laws applying to owner-operator truck drivers. (An appeal is anticipated at the time of this writing.) AB5 is simply an adaptation of the principles of Dynamex into state law. As one might expect, many companies are not happy. Lawsuits have already been filed. Uber, DoorDash and Lyft have vowed to have portions of the law overturned. Meanwhile, labor groups and employee advocates are ecstatic for the changes. Some estimate that misclassification of Employees as ICs costs the state up to $7 billion each year.

How this new law will affect services Californians have come to rely on remains to be seen. There is no doubt that part of the appeal of rideshare services and the like is the low cost, which will likely rise if drivers are reclassified as Employees. Furthermore, Lyft and Uber have consistently been losing millions (even billions) of dollars each quarter. Nevertheless, the demand for these services is still soaring. It will certainly be interesting to see the effect that AB5 has on the way we Californians get around.

If you own a business and have questions about employee classification, it is important that you consult an attorney who understands the employment classification landscape and the surrounding legal issues. The professionals at Shenon Law Group have years of experience dealing with business and employment issues and are here to help. Call or click today to schedule a brief complementary consultation.