A new law that changes how workers are classified in the “gig economy” will become effective in California next month. Assembly Bill 5 (AB5) codifies the three pronged “ABC test” that was established in the 2018 California Supreme Court case, Dynamex West Inc. v. Superior Court of Los Angeles, to determine whether a worker is considered an employee of a company or an independent contractor. Under this test, workers are considered employees unless their employer can prove:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
There are stark differences between independent contractors and employees. Generally, employees enjoy more structure and defined benefits whereas independent contractors have more flexibility in their schedules and control over their lives. In other words, there is a tradeoff, but both classifications have their benefits depending on workers’ needs. For employers, reclassifying workers is more expensive because they will be required to provide to employees a number of benefits that are not currently offered to independent contractors, including a minimum wage, workers’ compensation and other defined benefits. In addition, companies would need to withhold taxes for employees, which increases the cost of payroll.
Before the Dynamex decision, California employers used the Borello test to determine whether a worker should be classified as an independent contractor or employee. The aim of the Borello test was to determine whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Thus, the new ABC test poses a greater burden on employers because they have additional criteria to meet before their workers can be considered independent contractors rather than W-2 employees.
For gig economy behemoths like Uber and Lyft, their workers may not meet “part B” of the ABC test because the work performed by drivers might not be considered outside the usual course of their employer’s business. However, Uber argues that its primary scope of business is to serve as a technology platform for digital marketplaces and, therefore, driving is outside their usual scope of their business. Under this interpretation, Uber would be able to prove their drivers pass the three-pronged test.
For example, an electrician who is hired to fix wiring in a bakery would not be considered an employee because that work does not fit in the usual scope of the hiring entity. In contrast, that bakery might decide to hire a baking specialist who offers their services on a case-by-case basis for custom orders, and they would no longer be able to be considered independent contractors under the ABC test. The baking specialist would be classified as an employee because their work is considered within the usual scope of the hiring entity’s business.
While lawmakers claim workers’ rights is the impetus for this legislation, the underlying issue at hand may actually be the tax revenue the state loses as a result of workers being classified as independent contractors. According to the State of California Department of Industrial Regulations, the state loses approximately $7 billion in payroll tax revenue annually that they would otherwise receive if independent contractors were classified as employees. After all, this projected revenue would go a long way in paying for pet projects in the Golden State.
While AB5 would only affect California workers, these efforts are starting to spread to other states. According to Upwork, a global freelancing platform, there are approximately 57 million freelancers in the United States (35 percent of the US workforce) that contribute more than $1 trillion to the economy. The same report asserts 51 percent of freelancers said, “no amount of money would entice them to definitely take a traditional job.” In other words, these individuals do not want to be classified as employees with the employer that contracts with them.
This effort has also reared its head in Maine. LRs 2757 and 2779, sponsored by Sen. Shenna Bellows and Rep. Benjamin Collings, respectively, were submitted and reviewed by Maine’s Legislative Council in October. These requests, similar in nature to California’s AB5, would have limited which workers would be able to be classified as independent contractors and employees.
Fortunately, both bills failed to receive enough votes to be accepted into the second session. LR 2779 received zero votes in favor and LR 2757 managed to receive three votes from the council. Even better, neither decision is scheduled for an appeal by the sponsor at today’s meeting of Maine’s legislative council.