New Independent Contractor Guidelines in CA Could Affect “Gig” Companies like Uber

By: Brooke Barranti

A new law recently signed by California Governor Gavin Newsom will provide clearer guidelines on how to determine whether a worker should be classified as an independent contractor or employee.

AB 5 codifies the California Supreme Court’s decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, which lays out an “ABC test” to determine if a worker should be classified as an independent contractor rather than an employee. 

The signing into law of AB 5 means that over one million Californian workers will no longer be classified as independent contractors. The bill is more controversial than it appears, as the new law stands to impact “gig”-companies throughout California, like Uber and DoorDash, and it is likely that more states will follow suit. AB 5 has further fueled gig-companies’ fears that they will soon be required to reclassify workers as employees rather than independent contractors. Both independent contractors and the businesses that contract them, are concerned about what this means going forward and whether they will be impacted.  

Under Dynamex’s ABC test, to establish a worker is an independent contractor, the hiring entity must establish three factors. A) “that the worker is free from the control and direction of the hiring entity.” Put differently, the worker’s performance is not controlled by the employer. B) “the worker performs work that is outside the usual course of the hiring entity’s business.” In other words, the work must be doing work that is different from that of the employees. Finally, C) “the worker is customarily engaged in an independently established . .  . occupation, or business.”

Most gig-workers do not satisfy all of these requirements and, under the new law, are incorrectly classified as independent contractors. This classification means that independent contractors are not afforded certain rights such as minimum wage, workers compensation, state disability benefits, or unemployment benefits, that they would otherwise receive if they were classified as employees, all to the financial benefit of the companies that employ them. Further, the independent contractors cannot seek redress at government agencies such as the Labor Commission and the Equal Employment Opportunity Commission. 

“By misclassifying workers as independent contractors, employers exploit workers by denying them state benefits and the opportunity to unionize, that are afforded to other workers,” said Ruth Silver Taube, employment law attorney and Santa Clara School of Law professor.

AB 5 will likely protect low income workers who are unable to otherwise advocate for themselves, she said. 

Businesses that have been misclassifying workers as independent contractors will soon have to pay into worker’s compensation and unemployment insurance. They will also have to provide paid sick leave. In response to AB 5, gig-companies like Uber and Lyft have claimed that they are not in the ride-share business, but rather are technology companies that provide platforms for drivers to meet passengers and thus should be exempt from the new law.

“Unless there’s a new law, Uber and Lyft won’t be exempt” from AB 5, said Tim Broderick, employment law attorney at Broderick Saleen Law.

“Uber’s argument that it is a platform and not a transportation company defies logic and common sense, and it has been rejected by the Labor Commission” said Silver Taube. While there are several exemptions, Silver Taube explains that “the professionals that are exempt from AB 5 can advocate for themselves; they have more bargaining power than these low-wage workers who are paid at or below minimum wage.”

Many independent contractors, however, are worried that AB 5 will take away their flexible work structure.

“I am very new in the country and I have a family to take care of, so I have to drive on the weekends,” says Mahmood, an Uber driver in San Francisco who doesn’t have another job. It seems Mahmood is not in the minority. “I couldn’t drive full-time because it wouldn’t pay enough money,” says Joseph, a Lyft driver, who also works two other jobs in order to afford the cost of living in the Bay Area. 

Mahmood and Joseph are like the thousands of independent contractors working jobs that offer them flexibility and require little work experience so that they can make additional income. Both said they would choose to forego protections, such as minimum wage, if it meant they could continue to pick their own schedules.

“It’s a red herring that employees will not have flexibility,” explains Silver Taube, “an employer can give you flexibility whether you’re an employee or an independent contractor.”

A major concern for most gig-companies is the added costs that AB 5 will create once the law goes into effect.

“The larger question, beyond all of the legal questions, is whether these companies can survive financially under their current business models,” said Broderick. Companies “like Uber and Lyft are not profitable and the added burden of having to treat drivers as employees is likely to render them unprofitable for a long time or even put them out of business.”

“There will be costs, but it’s my belief that if your business model shifts risk from the company to the worker and strips away worker protections, then maybe you shouldn’t be in business,” Silver Taube said.