On September 11th the California Legislature passed Bill AB5, which essentially modifies the test by which workers are assessed to determine their proper classification – independent contractor or employee. For years California has used the common law test to determine a worker’s classification. The common law test, AKA the IRS guidelines is a 20-factor test. AB5’s passage allows the State to instead use the ABC Test – a three-prong test, which many believe is the more difficult for companies and workers to comply with.
AB5 was sponsored and passed in response to the Dynamex decision of 2018, in which CA’s highest court adopted a new standard by which to settle civil matters pertaining to worker classification.
Read more about Dynamex here:
As AB5 moved through the political and legislative process, the loudest voices within Silicon Valley warned of what it would mean to the new, rapidly growing gig economy. Gig companies like Uber and Grubhub put forth tremendous effort to stop the bill, at least in terms of its application to platform workers like rideshare and delivery drivers. Now that it passed without any revisions that allow gig companies to rest easier, the media has been firing off sensationalized headline after sensationalized headline.
From the New York Times – California Bill Makes App-Based Companies Treat Workers as Employees
From the LA Times – Newsom signs bill rewriting California employment law, limiting use of independent contractors
These headlines will certainly grab the attention of anyone with a stake in the game, be they workers, companies, investors, and consumers.
In truth, AB5 does not make anyone treat workers as employees, it simply changes the rules by which their proper classification is determined when a claim arises. 19 other States already use the ABC test in lieu of the common law test.
The ABC Test
- 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 work that is outside 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.
The primary challenge of the ABC Test – why it is more difficult to satisfy than the common law test – is that it places greater weight on the most difficult-to-meet aspects of the common law test. Prong 2– Is what the contractor does within the scope of what the business does? Or, is it outside of the usual course of business?
Prong 3 – Is the worker truly an entrepreneur? What evidence is there to suggest that he/she is, in reality, running a business?
Prong 2 requires companies have a clear and functional understanding of the intricacies of their core business model in terms of how it differs from the businesses being operated by contractors. Prong 3 requires a full-time educational and advocacy effort led not by the companies but by the workers themselves. In both cases, businesses are generally not equipped, nor should they internalize these initiatives.
Outsourcing IC management to Delivery Drivers, Inc. (DDI) is crucial post-AB5. At the end of the day, all AB5 does is change the rules. Those rules, however, are still followable, but satisfying them requires a much better and more constant effort.
California has been and continues to be arguably the most difficult State to do business in, both in general, but also in terms of labor-related regulation. The costs of litigating a labor matter in California are astronomical. Your risk of facing litigation or regulatory investigation can be reduced not solely by improving independent contractor compliance but also by limiting, if not eliminating the primary causes of action by aggrieved workers. Notably, that includes minimum wage violations, meal and rest period violations and overtime violations. DDI provides decades of experience assisting companies with managing unique compensation models, which are designed first and foremost to benefit the contractors and partners we mutually work with, but they also mitigate direct risk.
Predicting The Future of AB5
DDI has been on the front lines along with a coalition of major gig companies working with legislators, law firms and lobbyists in an effort to promote growth & innovation and secure the future of the gig economy. In the coming months, we can confidently predict several events.
- Companies are NOT going to change how they approach their labor force. The businesses commonly referred to in conjunction with this bill are designed and include revenue and profitability models that require the use of contractors in lieu of employees.
- Gig workers will not go quietly either. The vast majority of gig workers prefer the contractor model to an employee one. Check out the I’m Independent Coalition https://imindependent.co/
- AB5 will be challenged in court as unconstitutional.
- The issue will likely be settled by the voters in CA. Uber is the primary sponsor of a ballot initiative slated to be voted on in 2020.
AB5 stinks for workers and it stinks for businesses, but it isn’t the doomsday scenario many would have you believe. The version of the bill that passed is not likely to be the final version of the law 5 years from now. In the meantime, you can be proactive in how you adjust to the changing landscape. DDI can help you do that!