Gig Workers Would Get Same Rights as Employees Under Proposed California Law

New legislation awaiting action in the California Senate Committee on Labor, Public Employment and Retirement may change the way that California employers are allowed to determine worker classifications.

Changes are Coming for Independent Contractors and Employees

California Assembly Bill 5, or AB 5, is on its way to the California State Senate after support from the State Assembly and countless gig workers across the state. Under the proposed bill, gig and low wage workers would soon be afforded legal protections regarding their worker classification.

While employees are granted protections and rights including minimum wage pay, overtime pay, paid time off, and other benefits, workers classified as independent contractors are not entitled to any of these benefits. Due to the cost of classifying workers as employees, some gig workers and worker rights advocates claim that companies may be purposefully misclassifying their workers as independent contractors in order to cut costs.

Under AB 5, worker misclassification would be much harder, and more workers would be granted legal protections.

After the bill was passed by the Assembly in May, the author of the bill, Assembly Member Lorena Gonzalez, stated, “Big businesses shouldn’t be able to pass their costs onto taxpayers while depriving workers of the labor law protections they are rightfully entitled to.”

About AB 5

California Assembly Bill 5 passed the Assembly in May 2019 with overwhelming support and a vote of 53-11. Next, the bill heads to the State Senate in July. If it is passed by the Senate, the bill will codify a unanimous California Supreme Court ruling from a 2018 case between Dynamex Operations West Inc. and the Superior Court of Los Angeles. In this case, delivery drivers for nationwide same-day courier and delivery service Dynamex argued successfully against their classification as independent contractors.

According to these workers, they had been reclassified as independent contractors by Dynamex in an attempt by the company to cut costs and save money at the expense of their workers. The court ruling not only determined that the employees had been misclassified by Dynamex, but went further and came up with a new set of rules for determining California employee and gig worker classification.

As a result of the ruling against the delivery company, a test called the “ABC test” was established as the way for California employers to determine whether their workers are independent contractors or employees.

How Does the ABC Test Work?

The ABC test is a three part eligibility test intended to be used by California employers in order to determine worker classifications. Under the ABC test, a worker may only be classified as an independent contractor if they meet all three areas of eligibility.

In order to be classified as an independent contractor, a worker must:

• A: be free from the direction and control of the employer
• B: perform work that is outside of their employer’s core line of business
• C: customarily engage in an independently established occupation, trade,or business doing the same work they complete for the company

Workers who fail to meet any one of the points of eligibility may be entitled to the rights and protections of an employee. Due to the strict nature of these eligibility requirements, millions of workers may find their classification changing from independent contractor to employee if the bill is passed.

Under the new rules, workers who are given a significant amount of instructions on the direction of their duties or whose duties are under the control of their employer are disqualified from being classified as independent contractors.

Additionally, workers who perform duties for their employer that are similar or the same as the employer’s main line of work cannot be classified as independent contractors. If the worker performs work that is central to the employer’s business, they must be classified as an employee. This will drastically change the way that drivers for rideshare services are classified, as well as workers in many other lines of work.

Lastly, unless workers have their own established business or occupation doing the same kind of work they are completing for their employer, they must be classified as an employee. Workers who are classified as independent contractors must truly be independent, skilled workers, and not simply a way for employers to save money.

Massachusetts and New Jersey already use the ABC test in order to determine employee classifications, and several other states use the test in specific instances, including unemployment compensation eligibility. If California passes the proposed bill, they will join more than twenty other states that have already instituted some version of the ABC test.

What Does The New Legislation Mean for Gig Workers?

Workers who are classified as employees have many more rights and protections afforded to them under the law than workers who are classified as independent contractors. For workers who are employees, employers are required to pay at least the state minimum wage. This is in contrast to independent contractors who not covered by minimum wage laws. Additionally, employees are entitled to have their payroll taxes paid by their employers, and are entitled to worker’s compensation, overtime pay, disability benefits, contributions to Social Security and Medicare, and paid time off for sick days and vacation.

Another way that employees are afforded more rights than independent contractors is through the payment or reimbursement for tools, vehicles, uniforms, and other essential items needed in order for the worker to do their job. Independent contractors are generally required to own and maintain the vehicles they use for work purposes, as well as owning and maintaining their own tools and uniforms. Employees may be given these items by their employer, or reimbursed for their cost.

What Industries Will Be Affected by the New Law?

According to a 2017 report from the UC Berkeley Labor Center, approximately 8.5 percent of the California workforce is comprised of contract labor or gig workers. This number is higher than the national average of approximately 7.2 percent. More than 2 million workers across a variety of industries in the state may be affected by the proposed bill.

While delivery drivers and rideshare drivers are at the forefront of the battle for worker classification rights, the bill may affect many types of workers, including truck drivers, general contractors, freelance journalists, campaign workers, hair stylists and nail salon workers, strippers and adult entertainers, and other gig workers.

Rideshare companies, delivery services, and other businesses have been lobbying against the bill in an effort to stall or stop its progress. According to a joint op-ed published in the San Francisco Chronicle by Uber and Lyft officials in June 2019, changing rideshare driver worker classifications would pose a risk to the companies’ business models. The companies instead suggested that they be allowed to develop their own systems of worker-determined benefits, including retirement benefits, paid time off, and lifelong learning services, in exchange for being made exempt from the proposed new law.

Despite claims from rideshare drivers that their job descriptions and duties entitle them to be classified as employees rather than independent contractors, rideshare companies deny that they should be subject to employee classification laws. According to some Lyft and Uber drivers, these ride sharing companies classify their drivers as independent contractors rather than employees in an attempt to game the system. These drivers claim that their job duties are central to Lyft and Uber’s lines of business, and that they cannot legally be classified as independent contractors.

According to one Lyft driver, the rideshare service regularly requires him to accept certain ride requests or ride requests in certain areas of town. He claims that the company also tries to control and enforce the conversation topics he might discuss with passengers. According to him, this level of control clearly indicates that he is under the direction of his employer, and is an employee.

Uber has been bombarded with litigation over this issue, with at least one class action lawsuit leading to a $20 million settlement benefitting Uber drivers in California and Massachusetts.

In addition to the loss of benefits and fair pay for workers, employee misclassification also allegedly costs California billions of dollars a year in lost payroll taxes. One estimation by the California Labor Commissioner puts the loss at approximately $7 billion per year.

Are There Penalties for Employee Misclassification?

Employers who purposefully misclassify their workers as independent contractors in spite of the ABC test may be subject to a variety of penalties, including fines, back taxes, or even legal charges or jail time. These penalties may be enforced by the employer’s state, as well as the federal government and the IRS.

Under California law, fines of between $5,000 and $15,000 may be assessed against employers for violating employee misclassification laws. These fines may increase to $25,000 per violation if the employer is found to have engaged in a pattern of misclassification. Additionally, employers who have violated the law must post a prominent and visible notice of this violation for one year, in order to inform other employees.

The IRS may also require employers to pay between 1.5 and 3 percent of the federal income tax that the employer failed to withhold on behalf of their misclassified employees, as well as between 20 and 40 percent of the unwithheld Social Security and Medicare taxes. In some cases, employers may be subject to personal fines, misdemeanor charges, or jail time.