The California state senate on September 10 passed a controversial labor bill known as AB 5 that will disrupt the so-called “gig economy” should it be signed into law. The 29-11 vote brought the legislature one step further toward the bill’s ultimate enactment, which seems all the more certain after the state assembly gave its final approval today. The bill now will be sent to Governor Gavin Newsom, who has indicated that he intends to sign it.
AB 5 essentially codifies California Supreme Court’s flawed 2018 Dynamex decision that rewrote the standard for classifying individuals as independent contractors by altering the so-called ABC test, which has been used by many courts in determining whether or not someone is an entity’s employee.
Generally, the three factors of the ABC test include the following:
A)The worker is free from control or direction in the performance of the work under the contract of service and in fact;
B) The service is performed either outside the usual course of the business for which it is performed or is performed outside of all places of business of the enterprise for which it is performed; and
C) The individual is customarily engaged in an independent trade, occupation, profession, or business.
In Dynamex, the California court removed the second prong of part “B” so that performing work outside of all places of business of a putative employer can no longer establish that one is indeed an independent contractor. This seemingly minor change has huge implications for companies that procure the services of individuals who may never step foot into a company’s physical location.
In particular, in the evolving gig-economy, the change means that businesses providing a platform to a network of service-providers and their potential customers, such as ride-sharing companies like Uber and Lyft, may find themselves being deemed the employer of those service-providers.
Were that to happen, businesses would be forced to provide overtime, provide at least the minimum wage, be responsible for payroll taxes, and incur vicarious liability for them, among other things. It also means that the purported employees may be able to unionize under the National Labor Relations Act.
As written, AB 5 contains several exemptions and additional factors in some cases for weighing whether someone can be classified as an independent contractor, but the upshot is that the bill will make the use of legitimate independent contractors far more difficult. While passage of AB 5 may please the labor activists behind the measure, it will further diminish the Golden State’s business climate and may threaten some of its biggest companies’ longevity. That’s hardly a win.