At midnight on January 1, 2020, Uber and Lyft drivers in California may transform from contractors to employees. No, that’s not a modern reboot of Cinderella. Instead, it’s a possible result of a new and controversial state law: Assembly Bill 5 (AB 5).
Learning Your ABCs
AB 5 uses a new test to determine whether workers should be classified as independent contractors or employees. Under AB 5, workers are presumed to be employees unless the employer can prove that they:
A. Work free from the control and direction of the company that hired them, both under the terms of their contract and when actually doing their work
B. Do work that is not part of the employer’s usual business, and
C. Customarily engage in an independent business, profession, or trade doing the same type of work.
This “ABC” test is simpler and broader than the current California test or the federal test that applies to many other states. Under the AB 5 rule, many workers who are currently classified as independent contractors will have to be classified as employees.
Independent Contractors Have Fewer Legal Protections
This classification issue is important because of the differences in how the law treats employees and independent contractors. Employees are entitled to the minimum wage, overtime pay, health and safety protections, workers’ compensation, and unemployment insurance, among other things. Independent contractors don’t enjoy these protections.
What’s more, employers don’t have to withhold payroll taxes from independent contractors. Nor do they have to pay a share of the contractor’s Social Security and Medicare taxes. Employers must do all these things for their employees. These differences give employers a powerful incentive to classify workers as independent contractors rather than employees.
Who Is Exempt From AB 5?
AB 5 does include some exceptions — for example, it doesn’t cover investment advisors, real estate brokers, hairstylists, and certain other professionals. But most of the workers whom we think of as belonging to the gig economy will be covered by the ABC test set out in AB 5.
Questions Remain About the Law’s Scope
Even in California, many questions remain about exactly who the law covers. The California legislature will answer some of those questions when it passes clarifying legislation. Other questions will be answered by the courts.
For example, in September 2019, an Uber driver filed a class action lawsuit against the company for misclassifying drivers as independent contractors rather than employees. This case may be an early test of whether gig employers fall within the boundaries of the new California law.
The gig economy companies claim they are just “digital platforms” for matching gig workers with people who need their services. In other words, they say they’re not in the business of driving, delivery, cleaning, or whatever service the workers provide. Therefore, their workers don’t pass the Part B of the ABC test.
But the lawsuit argues that the services drivers provide are clearly part of Uber’s usual business—providing driving services. Once courts begin to weigh in on this dispute, we will know more about the law’s scope.
Will Other States Follow in the Footsteps of AB 5?
AB 5 is a California law, so it applies only within the boundaries of the state. Because California, which brought the world the “gig economy,” is also often a leader in employment law, other states may follow California’s lead in defining what makes a person an “employee” rather than a contractor. One-third of U.S. workers are part of the gig economy, so the question of whether these workers are employees or independent contractors will need to be answered in every state.
Some states (including Arizona and Florida) have already passed laws that classify most gig workers as independent contractors. And many states already have their own version of the ABC test. But the question remains unanswered in many other states: Stay tuned for more developments on this hot topic.