California’s new classification of independent contractors

| Nov 13, 2020 | Firm News

In January 2020, California’s controversial Assembly Bill 5 (AB5) went into effect. This new law dramatically changed the way California businesses are required to classify independent contractors. Intended to target ride-share companies Lyft and Uber, legislators hoped the bill would force employers to provide these “gig workers” higher wages, increased job security and health benefits.

The law has been resoundingly unpopular and has had much more far-reaching effects than intended. For example, it severely adversely effects truck drivers who rely on their independent contractor status to work for several different companies and the ability to work across state lines where employee laws are different.

Consequently, both judges and legislators have attempted refine AB5 since January 2020 to better define the scope and application of the law, although much of these efforts have been unsuccessful.

NEW CLASSIFICATION RULES UNDER AB5

The history of AB5 traces back to a 2018 ruling against the company Dynamex. Their delivery drivers alleged that Dynamex misclassified them as independent contractors. The California Supreme Court rejected previous rules classifying independent contractors and adopted a new standard that presumes all workers are employees, not contractors. Under the new “ABC test,” hiring entities can only classify a worker as an independent contractor if they establish:

  1. that the worker operates without direction in the performance of the work;
  2. that the worker performs work outside of the hiring entity’s usual course of business; and
  3. that the worker is engaged in an independently established business of the same nature of the work.

CONFLICT SURROUNDS RECLASSIFICATION

Ever since the 2018 ruling, California businesses and local legislators have been at odds, taking aggressive legal action. Uber and Lyft, along with other companies affected by AB5, have formed a coalition that is funding a multi-million dollar ballot measure that combats the new classification. Truck drivers and trucking companies have also railed against the bill, securing the support of a federal judge who blocked AB5 from changing their classification.

On the other hand, driver advocacy group Rideshare Drivers United weighed in as well, pressuring state legislators to enforce AB5 and award its members over $630 million in back pay. The State of California is currently suing both Uber and Lyft for refusing to adhere to the new classifications.

PROPOSITION 22

As the law matured throughout the year, subsequent lawsuits tested the law with industry-specific context and interpretations, most of which ruled against the law. Not surprisingly, a ballot initiative to define app-based transportation (rideshare) and delivery drivers as independent contractors and adopt labor and wage policies specific to app-based drivers and companies. This past November, it passed by an overwhelming margin.

It’s not yet clear how the new bill will affect AB5 with regard to non-rideshare and delivery drivers, but it is clear it sent a clear message to the California legislature by both employers and employees that AB5 is hugely unpopular and needs additional refinement.