State Legislation Setting Strict ‘Gig’ Worker Rules Nears Passage

California lawmakers are getting close to passing legislation that is aimed at tightening the standards for when employers can classify workers as independent contractors.

As the bill has advanced, tech companies, including app-based ride-booking giants Lyft and Uber, and delivery service provider, DoorDash, have been pushing for separate guidelines that would cover the drivers and delivery people essential to their businesses.

California Assemblywoman Lorena Gonzalez, a San Diego Democrat, is the chief sponsor of the bill. “Individuals are not able to make it on three side-hustles,” she said at the time it was introduced. “That shouldn’t be the norm. That shouldn’t be accepted.”

The legislation comes at a time when the nation has seen a rise in the number of independent contractors, or “gig workers,” who don’t have the same protections as full-fledged employees under labor laws governing wages, overtime, and unemployment insurance.

Misclassified workers can also cost state governments money. California’s Department of Industrial Relations says that worker misclassification results in the state losing an estimated $7 billion annually in payroll tax revenues.

It’s widely expected that Assembly Bill 5 will pass before lawmakers wrap up their session on Sept. 13. Gov. Gavin Newsom, a Democrat, has indicated he will sign the bill.

“Reversing the trend of misclassification is a necessary and important step to improve the lives of working people,” he wrote in an op-ed published in The Sacramento Bee this week. 

Newsom added that the bill would extend “critical labor protections to more workers by curbing misclassification.”

The legislation could provide a template for other states.

“It sets a precedent where we hope that, in other states, state legislatures will take similar action and will begin to make this a national issue," said Brian Dolber, an organizer in Los Angeles with the group Rideshare Drivers United.

The Brookings Institution last year noted that an estimated 15.5 million U.S. workers in 2017 had alternative primary employment arrangements, based on Bureau of Labor Statistics data. 

These are people who might be independent contractors, on-call, temporary help, or staff provided by contract firms.

The number of workers in this boat was up from 12.1 million workers in 1995 and from 14.8 million in 2005, Brookings added.

“The problem of misclassification is not a new one,” said Steve Smith, a spokesman for the California Labor Federation, a group made up of about 1,200 unions that backs Assembly Bill 5. 

“But we've really seen an acceleration in the last decade, in part due to the gig economy and entire business models being constructed around the idea of misclassification,” Smith added.

Lyft and Uber have been advocating for a plan where their drivers would not become traditional employees, but would be granted new standards for wages, and certain benefits and workplace protections.

The companies have had talks with Newsom’s office about this sort of compromise. A Lyft spokesperson said Wednesday that discussions were still active. But with only about a week left for lawmakers to act on bills in this session, odds of a breakthrough are dwindling.

If this push for a deal fails, and AB 5 is enacted as is, Lyft, Uber and DoorDash have indicated that they’re prepared to spend a combined $90 million on a ballot measure that would propose employment guidelines like those they’re looking for.

“We remain focused on reaching a deal, and are confident about bringing this issue to the voters if necessary,” Adrian Durbin, Lyft’s director of policy communications said in a statement.

Groups like the Labor Federation say that they’re prepared to fight such a ballot measure if necessary.

"It seems like a bullying tactic," Smith said.

Assembly Bill 5 would codify a three-part legal test for determining whether a worker is an independent contractor. The California Supreme Court outlined the test last year in its opinion in the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles County.

That case involved drivers who sued Dynamex, which provides package and document delivery services, alleging that the company had misclassified them as independent contractors.

In deciding the dispute, the court turned to what’s dubbed the “ABC” test. With this framework, a worker can be considered an independent contractor only if the employer hiring that person can establish the worker meets each of the test’s three criteria.

The first prong of the test is that a person must be free of an employer’s “control and direction” in doing their work. The second is that their work must be outside “the usual course” of the employer’s line of business. And the third is that the worker must be customarily engaged on their own, independently, doing work like the work that they are performing for their employer.

Footnotes in the Dynamex ruling offer some past examples of arrangements that have not passed muster in court under the test.

For instance, the court flagged a decision about a children’s clothing company in a Vermont case that designed all of its clothing and provided patterns and yarn to work-at-home knitters and sewers. The company failed to establish that these workers were sufficiently free of the company’s control to pass the test.

Likewise, a Virginia court found a construction company could not prove siding installers were engaged independently in that work. The installers had their own tools. But there was no evidence they had business licenses, cards, or phones, or that other employers paid them.

In contrast if, say, a shipping company hired a painter to paint the outside of a warehouse, and the painter completed the job as they saw fit, then moved onto another job, the painter would most likely clear the ABC test and could be classified as an independent contractor.

Assembly Bill 5 calls for making certain professions exempt from the ABC test, such as insurance brokers, doctors, dentists, lawyers, accountants and fishermen. 

Determining if workers in these jobs and other exempt fields are contractors would depend on how they line up with other state statutes and a broader legal test the California Supreme Court adopted in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

Independent truckers who own their own rigs, but take work hauling freight for trucking companies, are another constituency that is unhappy about where things stand with AB 5.

Most independent truckers don’t qualify for an exemption under the bill, although there was a somewhat limited carveout recently added for truckers in the construction industry.

Shawn Yadon, CEO of the California Trucking Association, explained that it would be “virtually impossible” for many independent truckers to pass the second prong of the test that calls for the work completed to be outside of the usual course of an employer’s line of business.

In this case, motor carriers and independent truckers are in the same line of work: trucking.

“We’re talking about the independent trucker, the independent owner operator trucker,” Yadon said, “trying to find a pathway where they can actually still exist in California because of the ABC test.”

“These are folks who have invested and built their business around this model for a long stretch of time,” he added. As of Wednesday, Yadon said there was no indication that language to resolve these concerns would be included in the bill. "Time is running out," he said.

The National Federation of Independent Business has voiced opposition to AB 5, saying that the ABC test is unworkable for all businesses, and that the amendment process for the bill has given the small businesses the group represents short shrift, while offering narrow exemptions to specific industries.

NFIB has said it would like to see a broad exemption from the ABC test that enables independent limited liability companies and "S corporations" to do business with one another.

While not all of the specifics are nailed down about what the ride-booking companies are proposing, they have offered some details.

An outline of their plan for drivers shared by Lyft calls for $21 in minimum pay per booked hour, as well as a “benefits fund,” which could offer access to injured worker protection and paid sick leave for drivers who spend 20 hours or more each week on booked rides.

The plan also includes “sectoral bargaining,” which typically involves striking labor agreements that apply across a segment of the workforce, rather than on an employer by employer basis.

Lyft argues that if they’re forced to abide by the ABC test framework, they would have to offer drivers less flexible work options, moving toward a model where the drivers have to work on more rigid schedules, with lower earnings potential.

But Dolber, with Rideshare Drivers United, said that Uber and Lyft are running a scare campaign saying they’ll take away drivers’ flexibility.

Dolber also said the $21 pay floor is problematic because it only counts when passengers are in a driver’s car, even though drivers spend a significant amount of time waiting for fares.

He said that many drivers are working longer hours these days to make ends meet. 

“If they’re working 70 hours a week, 80 hours a week, it’s really hard to tell them that they have a lot of flexibility,” Dolber said. A way to promote flexibility, he said, would be to pass AB 5 so that drivers would have the wage protections afforded to other workers.