By: Sarah Johnson

This week we will take a closer look at a California Assembly bill impacting the “gig economy” in that state. CA AB5 comes on the heels of a California Supreme Court ruling from last year in favor of workers who took issue with their classification as independent contractors. This new legislation would impose regulations for gig economy companies to follow when examining whether or not employees should be classified as independent contractors or employees.

First, What Does “Gig Economy” Mean?

Gig economy is a labor market characterized by the prevalence of short-term contracts or freelance work opposed to permanent jobs. The “economy” is rooted in flexible, temporary or freelance jobs, often connecting with clients or customers through online platforms. The most used example of a gig economy company is Uber with its freelance drivers that drive when and how much they want. The success of the “gig” lies in its ability to make work more adaptable to fit the demand for more flexible lifestyles. Here is a list of the “The 50 Best Gig Economy Apps to Land Your Next Gig”.

Second, What is the Difference Between an Independent Contractor and an Employee?

When examining what makes independent contractors different from employees, there can be differences in the type of work performed, but the major distinction is in how laws and policies are applied. If you are an employee, your company withholds income tax, Social Security and Medicare from the wages paid to you as well as contributing part of the amount due themselves. If you are an independent contractor, these withholdings and contributions are not made and you are responsible for paying the entire amount due yourself. Also, employment and labor laws also do not apply to independent contractors and contractors are not eligible for unemployment. Here is a grid detailing how employees are regulated differently from independent contractors from the Department of Health and Human Services:

DESCRIPTION	EMPLOYEE	CONTRACTOR
Employment Laws	Covered by a number of federal and state employment and labor laws	Not covered by employment and labor laws
Hiring Practice	A potential employee completes an application that is handled by Human Resources.  The approved applicant receives a job offer.  After a person accepts the position, the employer must ask for additional information about the employee such as date of birth, marital status, and citizenship status.	A potential contractor normally interacts with the person or department that wants a certain service or task completed.  A potential contractor might complete a proposal.  The contractor enters into a contract, including a Statement of Work with the legal or procurement section of the business.
Tax Documents	Provides name, address, Social Security number, tax filing status, and number of exemptions on a W-4	Provides name, address, Taxpayer Identification Number, and certification about back up withholdingvisit disclaimer page on a W-9
Payer’s Tax Reporting Requirements	Reports all money paid to the employee during the tax year on a W-2	Reports payments of $600 or more in a calendar year on a Form 1099
Reporting to Other Agencies	Reports for state and federal Unemployment Insurance	None
Value of Work or Contract	Earns either an hourly rate or a salary	A contract may be for a total amount.  It could be for an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed.
When Paid	An employee pay period must remain the same unless formally changed.  Pay periods vary from one week to one month.  Federal and state laws require that an employee be paid on the normal pay date or earlier if the pay check is not negotiable on the normal pay date, which can occur on holidays.	Accounts Payable pays a contractor after receiving an invoice.  The terms of the contract or Statement of Work dictate when payments are made, such as upon completion of a task or by periodic amounts.  Contractors are not paid by payroll staff in most businesses.

Nationally, companies must examine the four following characteristics to decide whether someone should be classified as an employee or an independent contractor:

• Does the company control or have the right to control what the worker does and how the worker does the job?
• Does the company control the business aspects of the worker’s job?  These include arrangements like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
• Is there a written contract or employee benefits such as a pension plan, insurance, or vacation pay?
• Will the relationship continue and is the work a key aspect of the business?

States can also enact their own regulations for this classification, which is where we get into the California Supreme Court decision and CA AB5.

What was Decided in Dynamex Operations West, Inc. v. Superior Court of Los Angeles

Dynamex Operations West, Inc. v. Superior Court of Los Angeles was brought as a putative class action by two delivery drivers for Dynamex. Prior to 2004, Dynamex classified all of their drivers as employees. In 2004 they adopted language in their employment contract that reclassified all current and future employees who work in the capacity of a delivery driver as an independent contractor.

How did this change impact the employees, now independent contractors, of the company? This reclassification allowed Dynamex to require drivers to provide their own vehicles and pay for all of their transportation expenses (fuel, tolls, vehicle maintenance and liability insurance). It made drivers responsible for independent contractor taxes and workers’ compensation insurance. Dynamex obtains its own customers and sets the rates; they then negotiate, on an individual basis, the amount drivers are paid. Drivers could be required to wear Dynamex shirts and badges or attach Dynamex decals to their vehicles. The drivers do have flexibility to work when they want and deliver for other companies as long as they complete their assigned Dynamex deliveries.

The Court’s unanimous decision removed the prior multi-factor test based on the California Industrial Welfare Commission’s Wage Orders for determining independent contractor versus employee status. Their decision places the burden on employers to establish, through a three-part “ABC Test,” that a worker is an independent contractor falling outside the purview of the applicable wage order. The decision will have the biggest impact on the “gig economy”, but it will also impact almost every company that utilizes independent contractors in California.

What does CA AB5 Say?

CA AB5 essentially would make it harder for companies to label workers as independent contractors instead of employees.

This bill expands upon the Dynamex ruling, instructing businesses to use the “ABC test” to determine if a worker is an employee or independent contractor. In order for a worker to qualify and be hired as an independent contractor, businesses must prove that the worker: (a) is free from the company’s control, (b) is doing work that isn’t central to the company’s business, and (c) has an independent business in that industry. If a worker does not meet all of the conditions, they have to be classified as employees.

If this bill were to be enacted, thousands of employees in the state would receive the labor protections and benefits employees receive like: a guaranteed minimum wage (currently $12 an hour in California), overtime pay, paid parental leave workers’ compensation, unemployment insurance and health care subsidies.

The legislation exempts a sizable list of occupations: doctors, dentists, lawyers, architects, accountants, engineers, insurance agents, investment advisers, direct sellers, real estate agents, hairstylists and barbers who rent booths at salons, as well as marketers and human-resources professionals.

What are potential issues?

First and foremost, the major issue facing the companies impacted by this legislation is what effect classifying (and thus compensating/supporting) workers as employees in lieu of independent contractors will have on profits and operations. Gig economy companies will incur huge additional expenses. Increased expenses will lead to more expensive services for the public.

People who think many of these companies are monopolizing the market (Uber/Lyft vs taxi drivers) believe this could help level the playing field and thus support this change. Companies like Lyft, Uber, Wag and Postmates are built on business models that rely heavily on cutting costs – by using independent contractors. The profit margin they manage to maintain is made possible by “employees” taking on operational costs, like car maintenance fees, and not being entitled to expensive benefits.

This legislation also extends to companies that are not directly associated with the “gig economy”. We have all see the massive layoffs media companies (magazines, newspapers and websites) have implemented over the last few years. These companies now to cut costs by providing “full-time freelance” positions that require a 40-hour workweek but eliminate benefits. Media layoffs have been blamed on poor profits, so how will this impact an industry that has already taken drastic measures in an attempt to cut costs?

Also, the Supreme Court ruling nor CA AB5 discuss how franchise or “joint employment” cases will be handled with these regulations. Both of these job relationships can qualify for aspects of the ABC rule, so where does legislation like this leave them?

Conclusion

This bill will likely prove an important bellwether indicating if the balance of power in the gig economy is going to start shifting towards workers. The next hearing for the bill is scheduled in August. You may want to keep an eye on the bill to see what arguments are made and what ultimately happens with the bill.