California Assembly Bill 5 (2019)

California Assembly Bill 5 or AB 5 is a state statute that expands a landmark Supreme Court of California case, Dynamex Operations West, Inc. v. Superior Court.[1] In that case, the court held that most workers are employees, ought to be classified as such, and the burden of proof for classifying individuals as independent contractors belongs to the hiring entity. AB 5 entitles workers classified as employees to greater labor protections, such as minimum wage laws, sick leave, and unemployment and workers' compensation benefits, which do not apply to independent contractors.[2] Concerns over employee misclassification, especially in the gig economy, drove support for the bill, but it remains divisive.[3]

California Assembly Bill 5 (2019)
California State Legislature
Full nameAn act to amend Section 3351 of, and to add Section 2750.3 to, the Labor Code, and to amend Sections 606.5 and 621 of the Unemployment Insurance Code, relating to employment, and making an appropriation therefor
StatusIn effect Jan 1, 2020
Introduced2018-12-03
Assembly voted2019-09-11 (56-15)
Senate voted2019-09-10 (29-11)
Signed into law2019-09-18
GovernorGovernor Gavin Newsom
CodeLabor Code and Unemployment Insurance Code
Section3351, 2750.3, 606.5, 621
ResolutionAB 5
WebsiteFull text of the bill

The law codifies and expands the scope of the ABC test, which was first established by the Commonwealth of Massachusetts Legislature on July 19, 2004. The test includes a three-prong assessment to determine if a worker was misclassified: (A) that “the individual is free from direction and control,” applicable both “under his contract for the performance of service and in fact,” (B) that “the service is performed outside the usual course of business of the employer,” and (C) that the “individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.” [4][5]

In response to the passage of AB 5, several industries began to lobby Sacramento for exemptions. Uber and Lyft made one such attempt on behalf of the rideshare industry, but their efforts were denied. The industries that were granted exemptions tended to have the following characteristics:

  • the independent contractors had the wherewithal to set or negotiate their own prices
  • the independent contractors had access to direct communication with customers
  • the independent contractors earned at least twice the minimum wage [6]

Uber and Lyft both said they plan to continue "business as usual" and are refusing to reclassify their drivers as employees, which potentially exposes the gig-work companies to litigation from state agencies.[7][8] Uber, Lyft, and DoorDash have pledged to spend $30 million each on a 2020 ballot initiative to reverse AB 5.[9] This initiative is on the ballot for the 2020 California elections as Proposition 22, and if it passes, then rideshare and delivery drivers will be classified as independent contractors.[10]

Provisions and history

On April 30, 2018, the Supreme Court of California ruled in Dynamex[1] to impose stricter requirements for employee classification. It created a 3-part test to determine whether an employee could be classified as a contractor rather than an employee, commonly known as the "ABC" test, replacing a previous 11-point standard set in Borello[11] in 1989 (the Borello test).[12][13]

The bill, introduced in December 2018, places the ruling on a statutory footing[14] by inserting §2750.3 to the California Labor Code, and, as a general rule, puts the burden of proof on employers to show that a worker is properly classified as an independent contractor where all three of the following conditions are met:[15][16]

  • 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
  • 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 for the hiring entity[17]

This test is excluded in certain specified cases, where Borello will continue to apply. This is declared without qualification for a specified list of occupations,[18] and, for other stated professional, B2B and construction services, respectively, separate lists of conditions must also be fully applicable in order to establish that a worker is an independent contractor.[19] Real estate licensees and repossession agencies were declared to be governed by the California Business and Professions Code instead.[20]

The law also gives cities in the state the right to sue companies for violating the law, where previously they could not. The California Attorney General's office and local prosecutors can also sue companies.[21]

Proponents of the bill said it would give workers previously classified as contractors minimum wage, overtime, sick leave, unemployment and other benefits, and prevent the state from losing $8 billion from payroll taxes that independent contractors and companies who use them do not pay and social benefits required due to lower pay. Opponents said it would increase labor costs by up to 30%, create higher costs for customers and reduced service, and reduce flexibility for workers.[22][23][24]

After discussions and amendments to the law, which primarily included exceptions for certain professions, the bill first passed the Assembly in May 2019. In August 2019, as the bill neared passage, gig economy companies Uber and Lyft also proposed a negotiated $21 minimum wage but to keep employees as independent contractors as an exception.[25] The proposals were not accepted by the legislature. Other amendments and exceptions were made, primarily to exclude particular professions. The bill drew national attention, including the support of multiple 2020 presidential candidates.[26]

After its final passage in the legislature, on September 11, 2019, Uber and Lyft both said they had no plans to reclassify workers as employees, with Uber's Chief Legal Officer Tony West saying "Just because the test is hard doesn’t mean we won’t be able to pass it. We continue to believe that drivers are properly classified as independent."[27]

In response to the implementation of the law, the United States Court of Appeals for the Ninth Circuit reinstated its decision in Vazquez v. Jan-Pro,[28] which impacts California franchise law and California independent contractor law,[29] by making it unclear that if a franchisor licenses its trademark to a franchisee whether the franchisor incurs the liabilities of an employer.

On December 16, 2019, California Labor and Workforce Development Agency released the Employment Status Portal to provide resources and information to workers and employers on AB 5.

AB5 was introduced by California assemblywoman Lorena Gonzalez[30] and endorsed by Governor Gavin Newsom.[31] It was approved by the California State Senate 29-11 on a party-line vote, by the Assembly 56-15, and signed by Governor Gavin Newsom on September 18, 2019.[32][2] It took effect January 1, 2020.[21]

Exceptions

Some professions are exempt from AB 5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers. Newspaper delivery workers will be given an extra year before compliance.[22][33]

In November 2019, the California Trucking Association, representing about 70,000 truck drivers in the state, filed suit in the United States District Court for the Southern District of California, challenging both the California Supreme Court Dynamex ruling and AB5. The Association argues that many of the represented drivers had opted to be independent contractors after having been employeed drivers, as this allows them to set their own schedules and otherwise profit from owning their own vehicle. Enforcement of AB5 would force them to be treated as employees and lose these benefits, the Association argued.[34]

On December 17, 2019, the American Society of Journalists and Authors and the National Press Photographers Association filed suit in United States District Court for the Central District of California, Western Division claiming the law unconstitutionally singled out freelance journalists by limiting the amount of work they can produce for any single publisher, unlike any other job category listed as "professional services".[35][36]

Uber and Postmates filed a similar suit at the end of December 2019, challenging that the law denies equal protection due to the what types of jobs were exempted or not.[37]

Reception and impact

Organizers expected AB5 to lead to the growth of labor unions.[38]

On the music industry

The Recording Academy expressed concerns that AB 5 would negatively impact gigging musicians, and stated that it is lobbying California lawmakers to inform them about "the impact of such legislation".[39]

Director of San Jose Jazz Brendan Rawson argues that because AB 5 requires any music venue to designate members of an act performing there even once as official employees of the venue itself, events such as music festivals will be severely and unnecessarily burdened. The only way around this, Rawson says, is for musicians to incorporate themselves. Rawson points out that this also extends beyond the musicians themselves, citing temporary hiring of SJPD officers for the San Jose Jazz's Summer Fest, all of whom must now be added as San Jose Jazz employees.[40]

The Lake Tahoe Music Festival announced it is shutting down after 40 years due to AB 5.[41]

On freelance journalism

Forbes criticized the bill's limits on freelance journalism and is advocating for California to change it.[36]:1 Assemblywoman Gonzalez acknowledged that some freelance journalists lost substantial income.[42] Several days prior, in response to potential job losses resulting from the bill, Gonzalez tweeted, "These were never good jobs. No one has ever suggested that, even freelancers. We will continue to work on this next year."[43]

In December 2019 Vox Media ended contracts with about 200 freelance sports writers and editors who wrote for the blog network SB Nation, and announced it would replace them with 20 new part-time and full-time employees.[44][36]:1 The company had carried stories supportive of AB5.[45][46] Assemblywoman Gonzalez criticized Vox, referring to them as “vultures” in connection with their previous use of freelance writers.[43]

Freelance journalists who live in California fear that it will be harder to get work, because companies will not want to deal with the additional paperwork and legal liabilities of AB5 and will instead hire someone from another state.[44]:1

On rideshare drivers

In response to the new law, Uber has made several changes to its app for drivers in California, such as allowing drivers to see destinations in advance, and removing penalties for rejecting rides.[47] It has also started testing a new feature that allows drivers to set their own rates, in 10% increments, with the passenger seeing the lowest fare accepted by an available driver, and drivers seeing how long they will likely wait to get dispatched based on their chosen rate.[47]

Enforcement actions

In May 2020, California Attorney General Xavier Becerra sued Uber and Lyft, alleging the ride-hailing companies have misclassified their drivers as contractors in violation of a new state law that went into effect this year. City attorneys from San Francisco, Los Angeles and San Diego have joined Becerra in the lawsuit. The suit, filed in San Francisco Superior Court, alleges Uber and Lyft have denied their workers key benefits and protections by classifying drivers as contractors rather than employees. The plaintiffs claim the decision denied workers the right to minimum wage and overtime pay, reimbursement for business-related expenses, access to unemployment and disability insurance as well as paid sick leave.[48]

California Superior Court Judge Ethan Schulman issued his ruling on August 10, 2020, stating that Uber and Lyft must treat their drivers as employees under AB-5, as their work in the context of the "ABC test" was not outside the usual course of their business, nor was a "multi-sided platform" as Uber and Lyft had argued but simply transportation companies that fell within AB-5's provisions. Both Uber and Lyft have stated their plan to appeal the ruling as well as seek an injunction to stay the order until the appeal is complete.[49]

Comparison with other jurisdictions

The ABC test, which AB5 codifies, is used in at least some areas of employment law in approximately half of the United States.[50] Other states that apply it specifically to wage and hour laws include New Jersey, Massachusetts and Connecticut.[50]

In 2016, Arizona passed HB 2652, which would classify many gig economy workers, including drivers in ridesharing services, as independent contractors.[51][52]

In 2018, Florida, Kentucky, Indiana, Iowa, and Tennessee passed laws defining specific on-demand economy workers as a "marketplace contractor" and classify them as independent contractors.[53][54]

In 2019, Arkansas passed HB 1850,[55] which codified a different 20-part test, used by the IRS, to classify workers as independent contractors.

References
  1. Dynamex Operations West Inc. v. Superior Court of Los Angeles, (2018) 4 Cal. 5th 903 (Cal. Sup. Ct. April 30, 2018).
  2. "Newsom signs bill rewriting California employment law, limiting use of independent contractors". Los Angeles Times. 2019-09-18. Retrieved 2019-09-18.
  3. Siddiqui, Faiz (2019-09-11). "California Senate passes ride-hail bill that has divided Democrats over the future of Uber and Lyft drivers". Washington Post. Retrieved 2020-01-17.
  4. "TIR 05-11: Effect of New Employee Classification Requirements under G.L. c. 149, § 148B on Withholding of Tax on Wages under G.L. c. 62B". Massachusetts Department of Revenue. 2005-09-13. Retrieved 2020-01-24.
  5. "AB5 in California: A New Era for Independent Contractors and Freelance Workers". Retrieved 11 March 2020.
  6. "What is California's New AB5 Law and How Will it Affect the Gig Economy?". Dordulian Law Group. Retrieved 2020-01-24.
  7. O'Brien, Sara Ashley. "Uber claims new California law still won't force it to classify drivers as employees". CNN. Retrieved 2019-09-12.
  8. Ghaffary, Shirin (2019-09-11). "Uber and Lyft say they don't plan to reclassify their drivers as employees". Vox. Retrieved 2019-09-12.
  9. Conger, Kate (2019-08-29). "Uber, Lyft and DoorDash Pledge $90 Million to Fight Driver Legislation in California". The New York Times. ISSN 0362-4331. Retrieved 2019-09-12.
  10. "California Proposition 22, App-Based Drivers as Contractors and Labor Policies Initiative (2020)". Ballotpedia. Retrieved 2020-07-25.
  11. S.G. Borello & Sons, Inc. v. Department of Industrial Relations, (1989) 48 Cal. 3d 341 (Cal. Sup. Ct. March 23, 1989).
  12. Dillon, Liam (2019-09-11). "Sweeping bill rewriting California employment law sent to Gov. Newsom". Los Angeles Times. Retrieved 2019-09-12.
  13. "The Dynamex Decision: The California Supreme Court Restricts Use of Independent Contractors". Labor & Employment Law Blog. 2018-05-01. Retrieved 2019-09-13.
  14. "California Senate passes bill to tighten 'gig' worker rule". Reuters. 11 September 2019. Retrieved 11 September 2019.
  15. Canon, Gabrielle (10 September 2019). "California's controversial labor bill has passed. Experts forecast more worker rights, higher prices for services". USA Today. Retrieved 11 September 2019.
  16. "How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law". JD Supra. 11 September 2019. Retrieved 11 September 2019.
  17. Labor Code 2750.3(a)
  18. Labor Code 2750.3(b)
  19. Labor Code 2750.3(c), (e)-(f)
  20. Labor Code 2750.3(d)
  21. Said, Carolyn (2019-09-16). "AB5 gig work bill: All your questions answered". San Francisco Chronicle. Retrieved 2019-09-18.
  22. "California legislature passes AB5 gig-work bill, which could turn contractors into employees - SFChronicle.com". www.sfchronicle.com. 2019-09-11. Retrieved 2019-09-12.
  23. Canon, Gabrielle. "Why some on-demand drivers are fighting for — or against — California's gig economy bill". USA TODAY. Retrieved 2019-09-12.
  24. "Some sectors warn that AB5 could hurt workers, raise prices - SFChronicle.com". www.sfchronicle.com. 2019-09-05. Retrieved 2019-09-12.
  25. "Uber, Lyft propose $21 an hour minimum wage for drivers in California, but there's a catch". NBC News. Retrieved 2019-09-12.
  26. "California Senate passes bill to tighten 'gig' worker rule". Reuters. 2019-09-12. Retrieved 2019-09-12.
  27. "Uber defiant as gig workers on verge of becoming employees under AB 5". The Mercury News. 2019-09-11. Retrieved 2019-09-12.
  28. "Vazquez v. Jan-Pro Franchising International, Inc., No. 17-16096 (9th Cir. 2019)". Justia.com. Retrieved 27 September 2019.
  29. Solish, Jonathan. "A Dark Day for Franchising: Ninth Circuit Reinstates its Misguided Vazquez Decision, Undermining the Franchise Business Model". The National Law Review. Bryan Cave Leighton Paisner LLP. Retrieved 27 September 2019.
  30. "California passes landmark gig economy workers' rights bill". The Guardian. 11 September 2019. Retrieved 11 September 2019.
  31. "Gig Workers Win in California". Gizmodo. 11 September 2019. Retrieved 11 September 2019.
  32. "California Passes Landmark Bill to Remake Gig Economy". The New York Times. 11 September 2019. Retrieved 11 September 2019.
  33. Dillon, Liam (2019-09-11). "Sweeping bill on independent contractors passes California state Senate". Los Angeles Times. Retrieved 2019-09-12.
  34. Bollag, Sophia (November 13, 2019). "California's new gig economy law challenged in court by truck drivers". The Sacramento Bee. Retrieved November 13, 2019.
  35. "COMPLAINT FOR VIOLATION OF FEDERAL CIVIL RIGHTS UNDER 42 U.S.C. § 1983 DECLARATORY AND INJUNCTIVE RELIEF" (PDF). Pacific Legal Foundation filing. December 17, 2019. Retrieved December 17, 2019.
  36. Flynn, Kerry (2019-12-19). "Publishers prepare for new California law that puts limits on freelance journalists". CNN. Archived from the original on 2019-12-27. Retrieved 2020-01-28. Two organizations that represent freelancers — American Society of Journalists and Authors and the National Press Photographers Associatio — sued the state of California on Tuesday, alleging that AB5 violates the First and Fourteenth Amendments. Pacific Legal attorney Jim Manley, who is working for the plaintiff, told CNN Business that the main problem with AB5 is it "treats journalists as second-class freelancers." "Under AB5, writers of marketing materials, perhaps news releases, can freelance freely, but if they write articles about that same news release, they are subject to the 35-submission limit," Manley said.
  37. Fingas, Jon (December 30, 2019). "Uber and Postmates sue California over gig worker law". Engadget. Retrieved December 31, 2019.
  38. https://eu.usatoday.com/story/news/politics/2019/09/10/what-californias-ab-5-means-apps-like-uber-lyft/2278936001/
  39. Hertweck, Nate. "What California's New Gig Economy Labor Law Means For Music Makers". Recording Academy Advocacy & Public Policy Office. The Recording Academy. Retrieved 30 December 2019.
  40. Rawsom, Brendan. "California's new gig worker law is disrupting the music industry and threatening all performing arts". CalMatters. The News Project. Retrieved 11 January 2020.
  41. "After 40+ years of classical music concerts offered outside with family and friends, the Lake Tahoe Music Festival will call a wrap to our summer festival with two performances in August of 2020". Lake Tahoe Music Festival. Archived from the original on 29 February 2020. Retrieved 29 February 2020. We now join many who also face increased uncertainty regarding employment costs and infrastructure needs associated with AB-5. So we will bring our festival to a close
  42. https://twitter.com/LorenaSGonzalez/status/1206962386055221253?s=20
  43. Binion, Billy. "California Freelancers Sue To Stop Law That's Destroying Their Jobs. Pol Says Those 'Were Never Good Jobs' Anyway". Reason. Retrieved 1 January 2020.
  44. Hussain, Suhauna (December 17, 2019). "Vox Media cuts hundreds of freelance journalists as AB 5 changes loom". Los Angeles Times. Archived from the original on 2019-12-26. Retrieved 2020-01-28. Vox Media will end contracts with about 200 people, including non-California freelancers who cover teams based in the state, and replace them with 20 new part-time and full-time staffers, according to a source familiar with the decision.
  45. https://www.vox.com/2019/9/11/20851034/california-ab-5-workers-labor-unions
  46. Campbell, Alexia Fernández (2019-05-30). "California is cracking down on the gig economy". Vox. Retrieved 2020-01-26.
  47. Said, Carolyn (2020-01-22). "Uber tests letting California drivers set own rates". San Francisco Chronicle. Archived from the original on 2020-01-22. Retrieved 2020-01-28. Uber made some major changes this month ... by showing them destinations in advance and removing any penalties for rejecting rides... Essentially those drivers now are bidding against one another for riders. Uber passengers will see only the lowest proposed fare range. If that driver rejects their ride request, they could see a new, higher fare range, as Uber would then show the request to the next-cheapest driver.
  48. Feiner, Lauren (2020-05-05). "California AG and cities sue Uber and Lyft, alleging they misclassified workers as contractors". CNBC. Retrieved 2020-05-19.
  49. Peters, Jay (August 10, 2020). "Uber and Lyft ordered by California judge to classify drivers as employees". The Verge. Retrieved August 10, 2020.
  50. Smith, Rebecca (2019-01-28). "Washington State Considers ABC Test for Employee Status". National Employment Law Project. Retrieved 2020-01-27. The ABC test is broad and inclusive, but it is nothing new: Four states, including California, New Jersey, Massachusetts, and Connecticut, already use the test in their wage and hour laws. About half the states, including Washington, use some version of it in their unemployment laws[.]
  51. "Arizona HB2652 | 2018 | Fifty-third Legislature 2nd Regular". LegiScan. Retrieved 2019-09-13.
  52. "Arizona Legislature Responds to Independent-Contractor Debate". SHRM. 2016-08-12. Retrieved 2019-09-13.
  53. Patrick Coate and Laura Kersey (2019-07-09). "Nontraditional Work Arrangements and the Gig Economy". www.ncci.com. Archived from the original on 2019-09-13. Retrieved 2019-09-13.
  54. Kessler, Sarah. "Handy is quietly lobbying state lawmakers to declare its workers aren't employees". Quartz at Work. Retrieved 2019-09-13.
  55. http://www.arkleg.state.ar.us/assembly/2019/2019R/Bills/HB1850.pdf
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