*The views expressed in this article do not represent the views of Santa Clara University.
Credit: Brett Jordan | Unsplash
The gig economy is a branch of the labor market that promotes flexibility and independence at the expense of job security. The gig economy workforce consists of temporary and part-time freelancers, as well as independent contractors instead of typical full-time employees. Use of the gig economy allows large companies like Uber, Lyft, and DoorDash to pass the burden of running rideshare and food delivery businesses to drivers who are classified as independent contractors.
California Assembly Bill 5 (AB5), otherwise known as the gig-worker bill, went into effect January 1, 2020 (Gusto). AB5 required companies to reclassify their independent contractors as employees with few exceptions. Unless a worker fulfills AB5’s ABC test requirements , they must be hired as a full-time employee. The ABC test was adopted from the California Supreme Court’s Dynamex Operations West, Inc. v. Superior Court (2018) decision and is expressed in AB5 as follows:
“Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed”
ABC Test Exceptions
“Existing law exempts specified occupations and business relationships from the application of the ABC test…these exempt relationships are governed by the multifactor test previously adopted in the case of Borello & Sons v. Department of Industrial Relations (1989).” Hiring entities need to satisfy all of the conditions of one of the exemption provisions to qualify for the exemption from the ABC Test.
Hiring companies may not automatically label AB5-exempt workers as independent contractors. Once a worker qualifies for AB5 exemption, the company must show that the worker is an independent contractor under the Borello test. This test, adopted from Borello & Sons, Inc. v. Department of Industrial Relations (1989), considers a variety of factors, including: control, training, supervision, how the work is done, who does the work, and potential tax implications.
Applying the above factors to popular rideshare and food-delivery services like Uber, Lyft, and DoorDash could be the demise of the businesses. Suddenly incurring the costs associated with providing health insurance and complying with wage laws that had previously been avoided could devastate a company’s finances without careful planning. The reclassification of independent contractors to employees would ruin the business models that were designed to minimize the costs to the gig economy business model.
Uber, Lyft, and DoorDash combatted AB5 through the Proposition 22 (“Prop 22”) ballot initiative. In summary, the measure would ensure app-based transportation and delivery companies would be classified as independent contractors instead of traditional employees (Ballotpedia). Hundreds of millions of dollars were spent on the effort to ensure its passage which ultimately came to fruition on November 3, 2020. Thereafter, on August 20, 2021, Alameda County Superior Court Judge Frank Roesch ruled that Prop 22 was unconstitutional in two parts and thus unenforceable. Oral arguments were heard for its appeal and the case remains open in the 9th
Circuit under Olson v. California. This case will likely reach the California Supreme Court.
Ridesharing and food-delivery services are not the only businesses negatively affected by AB5.
Any business that relies on the work of independent contractors could potentially struggle with the bill’s mandate for businesses to provide full-time employee perks that increase operational costs. However, there are types of employees who are exempt, such as insurance agents, attorneys (for example, those hired through Axiom), real estate agents, and certain business-to-business referral agencies and contractors who may be happily unaffected. Other factors to consider regarding AB5’s passage include:
Pros
Workers are entitled to a minimum wage, benefits, and other perks such as taking breaks.
Gig workers will have regular employee status.
Cons
We can only wait and see where the gig economy will go. Due to California’s profile, the forthcoming decision may have a ripple effect throughout the United States. We may see a decline in companies that rely on the gig economy to make profit, or a reinvention of the gig business model as we currently know it.
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