We want to ensure that our clients stay fully informed on the critical legal process surrounding the treatment of independent contractors in California under the landmark law (AB 5) which went into effect on January 1, 2020. Although the impact on companies like Uber, Lyft and DoorDash continues to be highlighted in the news, it is far more sweeping in its scope and coverage and applies to virtually every business in the state. Businesses have responded to this dramatic change in the law in a variety of ways:
- By reclassifying contractors to employees;
- By engaging in further lobbying to seek their own exception to the ABC test;
- By initiating lawsuits challenging the constitutionality of the law;
- By filing a ballot initiative to overturn parts of the law;
- By moving business out of California.
Below we have summarized notable developments that highlight the important legal, political and social issues wrapped up in the independent contractor debate. This summary is sourced from labor law firm, Littler Mendelson. Click here to read the full article published on 9/1/2020.
AB 5 – One Year Ago
AB 5 was based on an earlier ruling by the California Supreme Court in Dynamex Operations West v. Superior Court. The law was touted as a legislative “fix” to Dynamex, and adopts the ABC test for determining whether a worker is considered an employee under the California Labor Code. Under this ABC test, workers are presumed to be employees unless all three of the following conditions are met:
- The individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact; and
- The service is performed outside the usual course of the business of the employer; and
- 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.
AB 5 then went on to list several “exceptions” where the former test, known as the Borello test, would be used to determine employee/contractor status. It is worth noting that AB 5 uses approximately 130 words to describe the ABC test, and approximately 3,478 words to describe the exceptions.
Enforcement Actions
The state of California has begun to aggressively enforce AB 5, and Governor Newsom’s 2020 budget expressly included more than $20 million for enforcement of the new law. As California continues its aggressive enforcement actions, we expect a proliferation of suits such as the following:
- In June 2020, San Francisco’s district attorney sued food delivery platform DoorDash alleging that it was misclassifying its workers as independent contractors.
- In July 2020, the California Labor Commissioner’s Office filed suit under AB 5 alleging that an app-based car wash company in Southern California likewise misclassified some of its workers.
- In August 2020, the California Labor Commissioner filed lawsuits against Uber and Lyft, alleging that the transportation network companies misclassify their drivers.
Pending Legislation – AB 2257
Just days after AB 5 became effective, legislators began introducing bills seeking to amend key provisions of the new law. At one point early in 2020, there were at least 31 different bills seeking to modify or repeal AB 5 which have been distilled into a single vehicle: AB 2257. That bill has now been adopted by the California legislature and is couched as an urgency statute, meaning that if signed by Governor Newsom, the law will become effective immediately.
AB 2257 keeps the ABC test in place but modifies some of the current exceptions to AB 5 and introduces several new exceptions.
Proposition 22 – In the Hands of CA Voters
The fate of AB 5, at least with respect to transportation and delivery network companies, is ultimately in the hands of CA voters this fall. On the ballot in November’s election is Proposition 22—a ballot initiative that would exempt app-based rideshare and delivery drivers from the AB 5 test, and deem them independent contractors, subject to certain conditions.
Some experts have suggested that Proposition 22—which maintains independent worker status, while requiring companies to provide certain benefits historically provided by traditional employers—may represent an alternative approach to worker classification in the 21st century workforce. Still others have called on policymakers to engage in a dialogue about workplace modernization, and adopt proposals that promote choice, flexibility, and economic opportunity for workers.
This discussion remains vital because Proposition 22 would only impact transportation network companies and delivery network companies. Other businesses in California would still need to grapple with AB 5 and its multitude of complex “exceptions.”
Lawsuits Challenging AB 5
Not surprisingly, several groups have also attacked AB 5 in court and there are six lawsuits directly challenging the law.
- Williams Weisberg & Weisberg dba Diamond Court Reporters v. Becerra, (Filed Jan. 16, 2020)
- Olson v. Becerra, (Filed Dec. 30, 2019).
- American Society of Journalists and Authors, Inc. v. Becerra, (Filed Dec. 17, 2019).
- California Trucking Association v. Becerra, [Note: Original complaint predates AB 5; filed Oct. 25, 2018].
- Western States Trucking Association v. Becerra, (Filed Dec. 19, 2019).
- Crossley v. Becerra, (Filed May 6, 2020).
Conclusion
It appears the arc of California’s approach to the issue of independent contractors is set. We seem destined to battle these important issues out in the courthouse and at the ballot box.
Nobody can predict how all of this will be resolved. But we should continue to search for ways to allow our modern and dynamic economy to thrive. We should be creative and innovative in our approach to the challenges of the employment-independent contractor debate. And we should remember that, above all, this is about people – workers and business owners who contribute much to the fabric of our society. We must continue to strive for better ways to establish policy that meets the challenges of our modern workplace.
For specific guidance on the classification and treatment of independent contractors engaged by your company, please contact your Sequoia Risk Advisor, or connect with them directly in HRX.
Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2020 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved
