AB5 Set to Disrupt California’s Gig Economy

Peter Buckley – California’s Assembly Bill No. 5 (“AB5”) is set to drastically change the landscape “independent contractors” and “technology companies” operate in. AB5, signed into law by Governor Newsom, went into effect on January 1, 2020. The Bill seeks to prevent companies from misclassifying employees as independent contractors in an attempt to skirt employee benefits and wage-entitlements.

The Bill utilizes the “ABC Test” provided by the California Supreme Court in Dynamex Operations W. v. Superior Court. Under the ABC Test, a person shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates the following: (1) the person is free from control and direction of the hiring entity; (2) the person performs work outside the usual course of the hiring entity’s business; and (3) the person is customarily engaged in similar work as being performed by the hiring entity.

AB5 will have a significant impact on the business model of ride-hailing services such as Uber & Lyft who utilize independent contractors to avoid the increased costs of classifying drivers as employees. The companies’ ability comply with the ABC Test will likely rest on what the California courts determine to be their usual course of business—the second prong of the ABC test.

Uber and Lyft claim to be “technology companies” whose roles within the gig economy are ones of facilitation, stating they do not hire drivers, but “create and operate apps, which facilitate the connection of consumers and independent service providers.” In essence, the companies believe they satisfy the second prong of the ABC Test because hiring drivers is outside their normal course of business. The sponsoring legislators believe otherwise.

The drafters of AB5 intended to provide the 400,000 Uber and Lyft drivers the benefits afforded to employees such as minimum wage, workers’ compensation, unemployment insurance, and paid sick leave, however, these new benefits would likely come at significant cost: flexibility. Flexibility is the number one reason workers decide to work for Uber and Lyft with over 90% driving part-time. The majority of drivers are drawn to this part-time work because of the opportunity to supplement their primary employment with the flexibility the apps provide.

Should the California courts determine drivers are employees under the ABC Test, the intent of the Bill will likely backfire. Uber has publicly stated that, if drivers become employees, it will likely have to implement a shift system where drivers are assigned a time to work as opposed to their current situation where drivers work when they want. Additionally, by implementing a shift system, 400,000 drivers will not be needed, and companies will likely only employ the drivers willing to conform to their schedule.

California’s AB5 is set to cause a major shakeup in the state’s gig economy. Although intended to protect workers, the Bill could take away drivers’ abilities to work when they want, and even prevent many from working at all. Only time will tell.

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