United States: California Leads The Way In Passing Landmark Legislation To Classify Gig Workers As Employees

As we have previously reported here, California Assembly Bill 5 (the bill) is slated to codify the California Supreme Court's 2018 landmark decision in Dynamex Operations West v. Superior Court of Los Angeles, requiring companies to apply the "ABC" test in classifying their workers. The ABC test requires that workers be considered "employees" instead of "independent contractors" if their work is part of the employer's regular business, or if the employer exercises control over how its workers complete their jobs.

Yesterday, the California Senate approved the bill as currently drafted and returned it to the State Assembly, as a matter of formality, where it is expected to be approved. The bill received much opposition from various gig-economy companies despite Governor Gavin Newsom's endorsement. Once the Assembly passes the bill, Governor Newsom is expected to sign it into law, with an effective date of January 1, 2020. The bill will apply to many workers previously classified as independent contractors, and will apply to app-based companies operating in the gig-economy space, which will notably transform the gig economy in California.

In recent months, the bill was amended to include various carveouts for approximately 50 industries, including salon workers, insurance agents, doctors, lawyers, accountants, and securities brokers.

Notably absent from the current form of the bill is an exclusion for gig-economy workers. App-based companies have traditionally operated on a business model that touts the flexibility of the independent contractor model, which has been embraced by many gig workers, notwithstanding the lack of legal protections afforded to employees in the areas of earnings and benefits. However, if the bill is signed into law in its current form, gig-economy workers will be considered employees entitled to labor protections, which will likely increase the amount of wages and benefits such workers currently earn.

It is anticipated that the bill will have far-reaching consequences in California, affecting approximately 1 million workers previously classified as independent contractors and companies whose business models are based on utilizing independent contractors, who tend to be less expensive than employees. Once the bill is signed into law, most workers will likely need to be classified as employees entitled to minimum wage, overtime, and unemployment benefits. These newly classified employees may also gain the right to join a labor union.

The enactment of the bill will shake the gig economy to its core. App-based companies have utilized independent contractors as their workforce, without the requirements of overtime, minimum wage, and other employee protections that California law provides. Gig-economy companies have argued that added labor protections for gig-economy workers will destroy their companies (and thereby many jobs the legislation seeks to protect) by increasing the cost of doing business.

It is anticipated that various industries will challenge the law in multiple ways. For example, app-based companies have announced their intent to lodge strenuous objections to the bill and seek an exemption from the legislation through the state proposition process. Additionally, it was reported that Governor Newsom is attempting to negotiate and broker a deal between the bill's supporters and the affected employers. Accordingly, the landscape for gig-economy companies in California (and throughout the country) is even more uncertain with this newest development.

As a progressive and employee-friendly state, California is often at the forefront of enacting employee protection legislation, so this bill is likely to influence other states dealing with similar issues. Given the rapid changes in the law surrounding independent contractors, employers should scrutinize the independent contractor classifications of their workers based on the laws of their respective jurisdictions.

Please join us at our upcoming webinar on September 17, 2019, Wage and Hour Practices that California Employers Need to Get Right, for a detailed discussion of the bill and the anticipated effects it will have for California employers.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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