By Bill Zachry, Senior Fellow, Sedgwick Institute
Assembly Bill 5 (AB 5: Gonzalez; D-San Diego), which was just passed by the California legislature and then signed into law yesterday by Governor Gavin Newsom, will fundamentally change much of California’s gig economy, including how gig workers are classified and paid in the state. How will this measure impact the state – and will its waves sweep the rest of the country?
California is considered the birthplace of the “gig economy” – a free market system in which freelance, temporary and flexible job positions are common and organizations contract with independent workers for short-term engagements. Last year, the Bureau of Labor Statistics reported that 55 million people in the U.S. are gig workers, which, surprisingly, is more than 35% of the U.S. workforce. That number was expected to jump to 43% by 2020. With its change in classification of gig workers, moving them from previously being given independent contractor status to instead being considered employees, this new law may significantly change that projection.
The benefits for gig employers are that they can manage their labor needs efficiently without having to pay benefits, or can mange the ups and downs of their labor demands by not carrying full-time employees unnecessarily in slower times. The benefits for employees are that they can better manage their work-life balance or use the gig economy as a method to supplement their full-time incomes.
Under the law, workers are likely to be deemed employees if they perform a function central to a company’s business. AB 5 is based on the California Supreme Court ruling involving a package-delivery business, Dynamex Operations West. The company had reclassified its employees as independent contractors, slashing their benefits and forcing them to use their own vehicles and pay for gas. The “ABC test,” set out by the California Supreme Court in the Dynamex ruling, replaced an 11-point standard set in a 1989 court case which “made determining who was or was not an independent contractor complicated, expensive and prone to litigation,” according to the state Senate analysis of AB 5.
The ABC test, which was established by the California Supreme Court, determines independent contractor status under these conditions:
(A) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
(B) That the worker performs work that is outside the usual course of the hiring entity’s business.
(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
What does this mean for California?
While the Dynamex decision applied only to rules governing minimum wages, overtime and meal and rest breaks, AB 5 may have a greater impact on the employee and the employer. Under the legislation, workers classified as employees must be afforded workers’ compensation in the event of an industrial injury, unemployment and disability insurance, paid sick days and family leave. Businesses say the extra benefits will add as much as 30% to their labor costs.
Partially as a result of the resistance to the bill, its author, Lorena Gonzalez, agreed to exempt specific occupations from the court’s ABC test, leaving them subject to a lower standard for determining if the employee was an independent contractor. The exempted workers include doctors, dentists, lawyers, engineers, accountants, architects, realtors, travel agents, graphic designers, human resources administrators, grant writers, marketers, fine artists, investment advisors and broker-dealers. Several exemptions come with conditions. Commercial fishermen, for example, are exempt except from unemployment insurance. Barbers, cosmetologists and manicurists are exempt only if they set their own rates, are paid directly by clients and schedule their own appointments. Salespersons are exempt, provided their pay is based on actual sales, rather than wholesale purchases or referrals. Freelance writers and photojournalists are exempt only if they submit 35 or fewer articles or photographs in a year.
Another reason for the passage of AB 5 was that the legislature believed there was significant loss of tax revenue due to employee “misclassification.” New changes, when implemented, are expected to both help increase revenue and benefits for workers.
What happens next?
As usual, for legislation which has massive implications on the profitability and business models of large companies, the next two fields of battle on the employee / non-employee front will be in writing the regulations associated with AB 5 and litigation challenging sections of the bill. Changes which impact almost every industry in California will need time to be implemented. Uber and Lyft have also threatened an initiative to overturn the bill.
Employers will need to be thorough as they prepare for the possible sea change that could come with this new law. Examples of questions to address include how will companies be able to determine if a gig employee is on the clock or not on the clock? How will they calculate a minimum wage? And how will they keep track of vacation and sick time accrual?
Sedgwick will continue to evaluate the situation and share our recommendations in future publications and conversations. Proactive employers should begin talking with their human resources teams and consulting with their attorneys to set a clear path for compliance. Only time will tell what changes will come to California’s labor market under implementation of AB 5 – and whether other states will follow California’s lead.