On September 11, 2019, the California Senate passed Assembly Bill 5 (A.B. 5), which – if signed into law – will codify the so-called “ABC Test” utilized by the California Supreme Court in Dynamex v. Superior Court of Los Angeles to hold that the company’s delivery drivers were employees, not independent contractors, for the purpose of applying California Department of Industrial Relations Wage Orders. The bill, which California Governor Gavin Newsom is expected to sign, will have major implications on so-called “gig economy” workers, potentially leading to many being reclassified as employees rather than independent contractors.

The below addresses questions businesses and employers in California and elsewhere – as California is surely to be the first of many jurisdictions that will adopt similar legislation – may have. We also provide one practical solution to these employee-misclassification issues.

Q: What is the “gig economy”?

In very general terms, the phrase “gig economy” describes a marketplace wherein businesses operate by contracting with workers to serve as independent contractors on a non-exclusive and often temporary or short term basis. Uber and Lyft are amongst the most recognizable brands that use this business model, but it is widespread throughout a number of sectors and is particularly prevalent in the ride-sharing and virtual marketplace industries.

Q: Will A.B. 5 impact other industries?

While ride-sharing and virtual marketplace companies (VMCs) were the primary targets of, and are poised to be hit hardest by, A.B. 5, employee-misclassification issues arise in a number of industries where companies rely heavily on independent contractors to perform core aspects of a business’s work. Of course, what represents a “core aspect” of a business’s operation is often itself a point of contention, with ride-sharing companies taking the position that their core business is technology, not transportation.

Aside from the ride-sharing and virtual market industries, traditional transportation (e.g., trucking and delivery drivers) and entertainment companies also rely heavily on independent contractors to perform arguably core aspects of the business.

Medical and various other professional trades, as well as a few select niche industries, are expressly carved out from the bill’s coverage, at least in the immediate future, with some industries being exempt only for the first few years after enactment.

Q: How have courts and agencies addressed employee-misclassification issues?

State courts across the country interpreting a host of state laws governing the employee-employer relationship – including state minimum wage, wage and hour, and workers’ compensation laws – have come down on both sides of this issue. Some courts have found such workers to be properly classified as independent contractors, while others have found they are actually employees and thus entitled to protections afforded to employees under applicable law.

On the federal stage, the General Counsel for the National Labor Relations Board (NLRB) issued an Advice Memorandum on April 16, 2019, which applies a common-law agency test to find Uber drivers are independent contractors, not employees, and thus are not covered by the National Labor Relations Act (NLRA).

Likewise, the United States Department of Labor, the agency responsible for interpreting and enforcing the Fair Labor Standards Act (FLSA), issued an advisory letter on April 29, 2019 (FLSA2019-6), similarly declaring the department’s position that service providers for VMCs – including on-demand online referral services that connect service providers to end-market consumers through the use of proprietary software – are independent contractors, not employees.

Thus, workers seeking to bring employee-misclassification cases will likely rely on state law, rather than federal law, at least in the short-term.

Q: What is the likely impact of California A.B. 5?

In California, the passage and pending enactment of A.B. 5 is expected to tilt the scales in favor of finding employee-status for a large class of gig economy and other workers. Indeed, the text of A.B. 5 is explicit that it is “the intent of the Legislature in enacting this act to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law.” The Act further states that its purpose is to reclassify “potentially several million workers.”

The rigid, three-part “ABC Test” that will be codified by A.B. 5 places the burden on the business/employer to establish three distinct factors in order to demonstrate that a worker is an independent contractor, not an employee:

(A) The person 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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

While it is not necessarily a foregone conclusion that any particular industry of workers will be reclassified under this new test, gig economy businesses in California will have an uphill battle on the worker classification front once the bill becomes effective.

Governor Newsom has publically supported and is expected to sign A.B. 5. Once enacted, the law will go into effect on January 1, 2020, but expressly provides that liability may attach retroactively to existing claims “to the maximum extent permitted by law.”

Q: Will this have impact beyond California?

While A.B. 5 will only impact businesses and employers subject to California law, passage of this law is certain to spur similar bills in other jurisdictions seeking to keep pace with California’s progressive, employee-friendly labor code. New York’s legislature has already introduced similar legislation, and other jurisdictions are likely to follow suit.

Q: Combatting employee-misclassification suits?

Although the law on employee-misclassification will become even less favorable for businesses and employers in California, the use of carefully drafted mandatory individual arbitration clauses in employment and independent contractor agreements will remain a valuable tool in businesses’ toolkits to avoid costly class action employee-misclassification suits.

The U.S. Supreme Court has repeatedly upheld the use of properly drafted mandatory individual arbitration agreements in employment and independent contractor agreements. These agreements will continue to be important tools for employers and businesses contracting with independent contractors alike (see our previous post on the Court’s recent decision in Lamps Plus, Inc. v. Varela on this topic).