California Enacts New Independent Contractor Rules

Following a unanimous decision from the California Supreme Court, the State of California is set to enact Assembly Bill 5 in January. The law is designed to tackle the often-thorny issue of whether someone is an employee or an independent contractor. Although its language is broad, its principal purpose is not.

The central players in the employee vs. independent contractor battle taking place in California, and elsewhere around the country, are the companies at the forefront of the “gig economy.” If you are not familiar with that term, gig economy refers to positions within organizations that contract with workers for short-term engagements. The term “gig” is a slang word meaning “a job for a specified period of time” and originated in the music industry where bands often play “gigs,” or shows, for a specified amount of time. Even if you are not familiar with the term gig economy, you are likely familiar with some of the major companies that comprise it – Uber, Lyft, DoorDash, Grubhub, Airbnb, and HomeAdvisor – just to name a few.

The gig economy companies have almost universally taken the position that the people performing work for them – the drivers for Uber and Lyft, the delivery drivers for DoorDash and Grubhub, the lessors for Airbnb, and the repair people for HomeAdvisor – are independent contractors. Thus, they are not subject to many labor laws and regulations, such as Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act, and the Fair Labor Standards Act, nor are they required to contribute to and/or provide certain benefits that are often required to be provided to employees such as Social Security and Medicare taxes, unemployment insurance, disability insurance, and workers’ compensation insurance.

When Assembly Bill 5 goes into effect, in order to be classified as an independent contractor in California, the worker must be free to perform their work as they wish, must be in a different line of work from the company contracting with them, and must operate their own business. The first part of this – the worker must be free to perform their work as they wish – does not constitute a meaningful change from the tests that currently apply throughout the country courtesy of the FLSA. It is the latter two requirements that are new and promise to reshape the way gig economies operate.

But the gig economy companies are not taking these changes lying down. After failed efforts at lobbying their way into submarining the Bill, or to obtaining an exemption, they have taken to the courts to argue their case. Amongst the arguments being made is that they are technology companies that simply provide a platform for connecting independent contractors with customers who wish to hire them and, therefore, the drivers are not central to their business. So, for example, Grubhub is not a food delivery company, but rather a technology company that connects users to restaurants and restaurants to independent delivery drivers. Or Uber is not a “taxi” company, but simply a medium for persons who need a ride to find persons who are independently in the business of taking strangers from one place to another in their personal vehicles. In addition to seeking redress in the courts, some of the major gig economy companies intend to file a ballot initiative in the hopes that California votes will exempt them from the Bill.

So you might be asking, why are these companies fighting this so hard? Why don’t they just treat their workers as employees instead of spending a lot of money, and making some borderline absurd legal arguments, so they can maintain the current independent contractor status of most of their workforce? Well, according to the Los Angeles Times, the reclassification of workers from independent contractors to employees can add 20% – 30% to labor costs.

Using Uber as an example, investment bank Barclays recently estimated the reclassification of drivers from independent contractors to employees would cost Uber an estimated $500 million in 2019. Another way of looking at that is Uber is shorting the drivers who work for it in California by approximately half a billion dollars per year. Companies stealing that magnitude of wages and benefits from their employees every year is an issue that should receive nationwide attention and not just the attention given to it by the State of California. Sadly, states like Indiana have done the opposite by enacting laws that codify the independent contractor status of some gig economy workers. Although it is unlikely to do so anytime soon, those of us who care about workers’ rights can only hope the precedent being set by California eventually changes the way gig economy workers are classified throughout the country.