Rideshare companies like Uber and Lyft are at the center of statewide legal decision and could now have to reclassify hundreds of thousands of drivers. 

In January 2020 a new statute, Assembly Bill 5, took effect in California, potentially moving at least 2 million people from contractor to employee status. The law outlines to certain industries the threshold of employee status, but for others it is less clear.

Drivers have spent more than six years fighting companies like Uber in court, saying they have been intentionally misclassified. They argue drivers should be considered employees since their companies have so much control over their workday, with strict rules on their vehicle conditions, what rides they can take and which routes to use.

Equity research analysts at Barclays estimate that treating Uber and Lyft drivers as employees will cost the ride-sharing companies a combined $800 million per year. Hiring workers as employees rather than contractors can increase labor costs by 20 to 30 percent, given Social Security and Medicare taxes, unemployment and disability insurance, workers’ compensation, sick leave, minimum wage, overtime, rest breaks and protections against discrimination and sexual harassment. 

Uber, Lyft and DoorDash, all of which treat drivers as independent contractors, have garnered national attention, as they prepare to file a ballot initiative exempting themselves from the law. The law goes into effect January 1, 2020, and until then, California will categorize what laborers are employees and who will keep their status as a contractor.

“We will continue to advocate for a compromise agreement,” Uber Chief Legal Officer Tony West said in a news conference.

The company is pushing for a framework that would offer portable benefits, enable drivers to “have a collective voice” and establish a guaranteed earnings minimum while on a trip. West went on to say Uber is continuing to explore several legal and political options to lay the groundwork for a statewide ballot initiative in 2020. 

Uber and Lyft both said they had no plans to reclassify workers as employees – but it might not be up to them. 

Ever since the California Supreme Court upheld the Superior Court of Los Angeles v. Dynamex Operations West Inc., California businesses have been preparing to restructure how employees are legally classified.

In a landmark decision April 30, 2018, the courts concluded delivery company Dynamex wrongfully classified its workers as independent contractors and replaced the former method of classification, the 11 point Borello test, with the ABC test. 

To hire an independent contractor, businesses must prove the worker: (a) is free from control and direction in the performance of services; (b) is performing work outside the usual course of the business of the hiring company; and (c) is customarily engaged in an independently established trade, occupation or business.

Shortly after the ruling, California assemblywoman Lorena Gonzalez introduced bill AB 5, which will make businesses adhere to the court’s standard on a state level. 

Employees are entitled to greater labor protections, such as minimum wage laws, sick leave and unemployment and workers’ compensation benefits, which do not apply to independent contractors. 

According to the bill, if a worker does not meet all three ABC criteria they must be classified as an employee. AB 5 was endorsed by Gov. Gavin Newsom, and after approval by the Senate, Newsom signed the bill in September 2019.

“Today, we are disrupting the status quo and taking a bold step forward to rebuild our middle class and reshape the future of workers as we know it,” bill author and assemblyperson Lorena Gonzalez said in a statement. “As one of the strongest economies in the world, California is now setting the global standard for worker protections for other states and countries to follow.”

Labor leaders argue workers deserve benefits and hope to organize newly classified employees, since independent contractors may not join unions under federal law. 

“For far too long, big corporations skirted their responsibility to provide basic protections to workers,” executive secretary-treasurer of the California Labor Federation Art Pulaski told reporters. “The California labor movement will be laser-focused on implementing and enforcing AB 5.”

Apart from the more widely discussed affectees, the bills impacts industries far beyond rideshares. Businesses in dozens of sectors, including trucking, entertainment and publishing, are scrambling to figure out how the law affects them, whether they must adapt to it and, especially, whether they can persuade lawmakers next year to add them to a score of carved-out occupations.

Media and publishing is another example of an industry in a transition period. The law caps the number of articles a California ‘independent’ writer can produce for a publication in a year at 35. It is low enough that sites can no longer employ California freelancers to do things like write weekly columns or roundups. 

The law could make it highly impractical to hire Californians for high-volume content jobs, such as producing daily news hits or writing recaps.

AB 5 enables the California attorney general, city attorneys and local prosecutors to sue companies over violations. Industry-related exemptions at the legislative level are expected to be lobbied for.

“Every single lobbyist in town got booked up for this gig to try and carve out specific exemptions within specific industries,” Renee Public Policy group lobbyist Dane Hutchings said. 

As a lobbyist, Hutchings said he believes this type of legislation can create a system of winners and losers based on who has the most pull in Sacramento. He said there needs to be more support in place for those who do not end up as winners.

If companies are sued for violating the new law, it would require a judge’s order to force companies to reclassify their workers. Large entities with deep pockets like Uber and Lyft would likely fight their cases for years

“There has to be an acknowledgment that the folks being subjected to this law don’t have a lot of time to make the necessary adjustments,” Hutchings said. 

So far, the California Supreme Court has yet to apply all three prongs of the ABC test in any single case. The point here is that the interpretation of AB 5 will be just as critical as the legislation itself – and right now, that interpretation is unknown. 

“It’s going to be confusing until some of theses lawsuits go to ruling,” law professor Stephen Stern said. “Unless this is cleared up, a lot of work is going to be moved outside of California.”

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