California Clarifies Independent Contractor Rules in Blow to “Gig Economy”

In 2018, the California Supreme Court’s Dynamex decision redefined the definition of employee v. independent contractor through an “ABC test” followed by many states.  On September 18th, California Governor Newsom signed AB 5 which codified the Dynamex decision with certain exceptions.

Embracing the Dynamex ABC Test

Under AB 5, a worker is an employee and not an independent contractor unless the hiring entity demonstrates that all of the following conditions are met:

(A) The person 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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The new law, however, created a carve-out for a number of occupations including direct salespeople; licensed professionals in accounting, architecture, engineering, insurance, investments and law; and physicians, surgeons, dentists, psychologists, and veterinarians.  The carve-out, however, expires in 2023 unless extended by the legislature.

It also exempts certain professional services for individuals who maintain their own business location, have a business license, can set/negotiate their own rates and hours, and the individuals exercise discretion and independent judgment in performing their services.  Professional services can include marketing; human resource administration; graphic design among other services.

Opposition by Gig Economy

The law was strongly opposed by “gig economy” giants like Lyft and Uber who were resisting having their drivers being designated as employees.   The Senate Labor Committee analysis of the bill addressed this issue head-on:

Finally, it is worth mentioning that, while there has been significant media discussion on disruption, digital applications, and the “gig economy”, this serves more to confuse than clarify.  On one hand, if a client secures the services of a contractor through an intermediary, it is unclear how the People of California are well served if the law makes a distinction between the intermediary being contacted through the Yellow Pages or the internet.

On the other hand, an internet application, no matter how clever, cannot turn lead to gold.  Misclassification is misclassification. A company that utilizes the independent contractor model to undercut the employer-based model to cut costs and achieve profitability or scale is a company that misclassifies its workers. The historical reality of the capitalist marketplace and the State’s need to protect workers are not repealed by a clever branding initiative, “killer” application, or product placement in a Netflix special. Lead cannot be gold.

DoorDash, Lyft, Postmates and Uber intend to spend millions on a ballot initiative to exempt themselves from the law and can be expected to challenge the law in court.

The statute is below.

Cover Photo (CC2.0):  ride sharing uber lyft by Stock Photo (quotecatalog.com)