California Assembly Bill 5 (2019)
California Assembly Bill 5 or AB 5 is a state statute that expands a landmark Supreme Court of California case, Dynamex Operations West, Inc. v. Superior Court. In that case, the court held that most workers are employees, ought to be classified as such, and the burden of proof for classifying individuals as independent contractors belongs to the hiring entity. AB 5 entitles workers classified as employees to greater labor protections, such as minimum wage laws, sick leave, and unemployment and workers' compensation benefits, which do not apply to independent contractors. Concerns over employee misclassification, especially in the gig economy, drove support for the bill, but it remains divisive.
The law codifies and expands the scope of the ABC test, which was first established by the Commonwealth of Massachusetts Legislature on July 19, 2004. The test includes a three-prong assessment to determine if a worker was misclassified: that “the individual is free from direction and control,” applicable both “under his contract for the performance of service and in fact,” that “the service is performed outside the usual course of business of the employer,” and that the “individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”
In response to the passage of AB 5, several industries began to lobby Sacramento for exemptions. Uber and Lyft made one such attempt on behalf of the rideshare industry, but their efforts were denied. The industries that were granted exemptions tended to have the following characteristics:
- the independent contractors had the wherewithal to set or negotiate their own prices
- the independent contractors had access to direct communication with customers
- the independent contractors earned at least twice the minimum wage
Provisions and history
On April 30, 2018, the Supreme Court of California ruled in Dynamex to impose stricter requirements for employee classification. It created a 3-part test to determine whether an employee could be classified as a contractor rather than an employee, commonly known as the "ABC" test, replacing a previous 11-point standard set in Borello in 1989.The bill, introduced in December 2018, places the ruling on a statutory footing by inserting §2750.3 to the California Labor Code, and, as a general rule, puts the burden of proof on employers to show that a worker is properly classified as an independent contractor where all three of the following conditions are met:
- 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
- the worker performs work that is outside the usual course of the hiring entity's business
- 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
The law also gives cities in the state the right to sue companies for violating the law, where previously they could not. The California Attorney General's office and local prosecutors can also sue companies.
Proponents of the bill said it would give workers previously classified as contractors minimum wage, overtime, sick leave, unemployment and other benefits, and prevent the state from losing $8 billion from payroll taxes that independent contractors and companies who use them do not pay and social benefits required due to lower pay. Opponents said it would increase labor costs by up to 30%, create higher costs for customers and reduced service, and reduce flexibility for workers.
After discussions and amendments to the law, which primarily included exceptions for certain professions, the bill first passed the Assembly in May 2019. In August 2019, as the bill neared passage, gig economy companies Uber and Lyft also proposed a negotiated $21 minimum wage but to keep employees as independent contractors as an exception. The proposals were not accepted by the legislature. Other amendments and exceptions were made, primarily to exclude particular professions. The bill drew national attention, including the support of multiple 2020 presidential candidates.
After its final passage in the legislature, on September 11, 2019, Uber and Lyft both said they had no plans to reclassify workers as employees, with Uber's Chief Legal Officer Tony West saying "Just because the test is hard doesn’t mean we won’t be able to pass it. We continue to believe that drivers are properly classified as independent."
In response to the implementation of the law, the United States Court of Appeals for the Ninth Circuit reinstated its decision in Vazquez v. Jan-Pro, which impacts California franchise law and California independent contractor law, by making it unclear that if a franchisor licenses its trademark to a franchisee whether the franchisor incurs the liabilities of an employer.
On December 16, 2019, California Labor and Workforce Development Agency released the to provide resources and information to workers and employers on AB 5.
AB5 was introduced by California assemblywoman Lorena Gonzalez and endorsed by Governor Gavin Newsom. It was approved by the California State Senate 29-11 on a party-line vote, by the Assembly 56-15, and signed by Governor Gavin Newsom on September 18th, 2019. It took effect January 1, 2020.
Exceptions
Some professions are exempt from AB 5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers. Newspaper delivery workers will be given an extra year before compliance.Legal challenges
In November 2019, the California Trucking Association, representing about 70,000 truck drivers in the state, filed suit in the United States District Court for the Southern District of California, challenging both the California Supreme Court Dynamex ruling and AB5. The Association argues that many of the represented drivers had opted to be independent contractors after having been employeed drivers, as this allows them to set their own schedules and otherwise profit from owning their own vehicle. Enforcement of AB5 would force them to be treated as employees and lose these benefits, the Association argued.On December 17, 2019, the American Society of Journalists and Authors and the National Press Photographers Association filed suit in United States District Court for the Central District of California, Western Division claiming the law unconstitutionally singled out freelance journalists by limiting the amount of work they can produce for any single publisher, unlike any other job category listed as "professional services".
Uber and Postmates filed a similar suit at the end of December 2019, challenging that the law denies equal protection due to the what types of jobs were exempted or not.
Reception and impact
Organizers expected AB5 to lead to the growth of labor unions.On the music industry
expressed concerns that AB 5 would negatively impact gigging musicians, and stated that it is lobbying California lawmakers to inform them about "the impact of such legislation".Director of San Jose Jazz Brendan Rawson argues that because AB 5 requires any music venue to designate members of an act performing there even once as official employees of the venue itself, events such as music festivals will be severely and unnecessarily burdened. The only way around this, Rawson says, is for musicians to incorporate themselves. Rawson points out that this also extends beyond the musicians themselves, citing temporary hiring of SJPD officers for the San Jose Jazz's Summer Fest, all of whom must now be added as San Jose Jazz employees.
The Lake Tahoe Music Festival announced it is shutting down after 40 years due to AB 5.
On freelance journalism
criticized the bill's limits on freelance journalism and is advocating for California to change it. Assemblywoman Gonzalez acknowledged that some freelance journalists lost substantial income. Several days prior, in response to potential job losses resulting from the bill, Gonzalez tweeted, "These were never good jobs. No one has ever suggested that, even freelancers. We will continue to work on this next year."In December 2019 Vox Media ended contracts with about 200 freelance sports writers and editors who wrote for the blog network SB Nation, and announced it would replace them with 20 new part-time and full-time employees. The company had carried stories supportive of AB5. Assemblywoman Gonzalez criticized Vox, referring to them as “vultures” in connection with their previous use of freelance writers.
Freelance journalists who live in California fear that it will be harder to get work, because companies will not want to deal with the additional paperwork and legal liabilities of AB5 and will instead hire someone from another state.
On rideshare drivers
In response to the new law, Uber has made several changes to its app for drivers in California, such as allowing drivers to see destinations in advance, and removing penalties for rejecting rides. It has also started testing a new feature that allows drivers to set their own rates, in 10% increments, with the passenger seeing the lowest fare accepted by an available driver, and drivers seeing how long they will likely wait to get dispatched based on their chosen rate.Enforcement actions
In May 2020, California Attorney General Xavier Becerra sued Uber and Lyft, alleging the ride-hailing companies have misclassified their drivers as contractors in violation of a new state law that went into effect this year. City attorneys from San Francisco, Los Angeles and San Diego have joined Becerra in the lawsuit. The suit, filed in San Francisco Superior Court, alleges Uber and Lyft have denied their workers key benefits and protections by classifying drivers as contractors rather than employees. The plaintiffs claim the decision denied workers the right to minimum wage and overtime pay, reimbursement for business-related expenses, access to unemployment and disability insurance as well as paid sick leave.Comparison with other jurisdictions
The ABC test, which AB5 codifies, is used in at least some areas of employment law in approximately half of the United States. Other states that apply it specifically to wage and hour laws include New Jersey, Massachusetts and Connecticut.In 2016, Arizona passed HB 2652, which would classify many gig economy workers, including drivers in ridesharing services, as independent contractors.
In 2018, Florida, Kentucky, Indiana, Iowa, and Tennessee passed laws defining specific on-demand economy workers as a "marketplace contractor" and classify them as independent contractors.
In 2019, Arkansas passed HB 1850, which codified a different 20-part test, used by the IRS, to classify workers as independent contractors.