California Senate Could Rule On Gig Economy Law This Week

As early as this week, California’s state Senate will take up a measure that could forever change the future of the gig economy, and firms like Uber and Lyft, in both the state and nationwide. The law in question is Assembly Bill 5, a measure that would reclassify many gig workers in the state – Uber and Lyft drivers in particular – as regular W-2 employees instead of as 1099 independent contractors (their current designation).

The issue has been a contentious one since the California State Assembly passed the controversial bill earlier this year. Advocates of the bill argue that the luminary digital startups have built their business models on skirting labor laws, misclassifying workers as contractors to avoid things like workers’ comp, health benefits, collective bargaining and overtime pay.

As Labor Attorney Shannon Liss-Riordan told The Verge, the model depends on firms being able to “shift all expenses and burdens of employment from themselves to the workers whose labor has made these companies what they are today.”

But opponents see the situation somewhat differently, noting that these regulations won’t protect workers from predatory employers and warning that they will destroy the employer in pursuit of offering protections most gig workers aren’t seeking – and, in some cases, are actively trying to avoid.

Joe Rajkovacz with the Western States Trucking Association said independent drivers are opposing the law to the point that they came out to protest with picket signs in Sacramento, because the net effect will put small, individual truck owner/drivers at risk of being squeezed out of their jobs.

“This law directly affects the ability of that individual to even exist in the marketplace,” he said.

So what exactly is the law, how likely is it to pass and will it ever actually go into effect?

AB 5: A Quick Primer

The state of gig workers – and whether they should be considered employees in the traditional sense or independent contractors – has triggered a long, complex debate with no clear consensus.

Earlier this year, the Department of Labor found that gig workers like Uber drivers are contractors, and are thus ineligible for minimum wages and overtime pay. That ruling echoes a 2018 decision from a federal judge.

But California’s state courts saw the issue somewhat differently. In May of 2018, the California Supreme Court ruled that workers for delivery company Dynamex should be considered employees, not contract workers, under California law. The Dynamex case, in particular, is over a decade old and stems from delivery drivers seeking employee status.

According to San Diego Assemblywoman Lorena Gonzalez, AB5 was designed to essentially codify the Dynamex decision into law.

“Clearly they know they’re in a tough spot,” Gonzalez said in reference to ridesharing services Uber and Lyft. “They’re violating Dynamex as it is. They know AB5 is coming.”

AB5 creates a standard for determining employee/contractor classification by making use of an “ABC” test. A worker can be classified as a contractor only when the following three conditions are met:

1. The worker is free from the “control and direction” of the company that hired them while they perform the work for which they were contracted.
2. The worker performs a function that falls outside the client firm’s normal scope or type of business.
3. The worker being hired has a business that is independent of the trade for which they have been hired.

The law comes with a long list of exemptions, primarily in areas where workers have a history of setting their own rates: construction contractors, business-to-business services, freelance writers, fine artists, grant writers, graphic designers and podiatrists, for example. The carve-outs also include doctors, dentists, lawyers, architects, accountants, engineers, insurance agents, investment advisers, direct sellers, real estate agents, hairstylists, barbers, estheticians and electrologists.

Likely to be hardest hit, according to market watchers, are firms like Uber and Lyft, which have built their business model around providing a technological platform for independent drivers to connect directly with consumers. A change would result in all of those gig workers taking a bite out of those firms at best – and could potentially devastate some at worst.

“Our business would be adversely affected if drivers were classified as employees instead of independent contractors,” Uber wrote in its S-1 filing with the Securities and Exchange Commission (SEC) earlier this year.

What Comes Next?

The AB 5 has passed the California State Senate’s Appropriations Committee and is now set to move to the floor for a full vote. If it passes, it will go to Governor Gavin Newson’s desk, and he has already indicated he would sign the bill into law at that point.

Whether the bill will pass the State Senate remains to be seen, though it is considered likely. In late August, Uber and Lyft jointly released a proposal that promised to pay their drivers $21 an hour (but only while on a trip), provide them with sick leave and “empower” them to “have a collective voice” in negotiations going forward. The proposal, according to the firm, is an attempt to protect drivers’ rights as workers, while maintaining the flexibility of the gig economy and the quality that ridesharing consumers have come to expect.

The petition, however, is largely expected by watchers to fail, and AB 5 is largely expected to pass the Senate. Assemblywoman Gonzalez noted that at this point, the big ridesharing companies don’t have enough credibility to offer to solve the problem in-house.

“These companies have been in existence for years now. And they’ve known that their drivers have these complaints and these problems, and they’ve done nothing to address it,” she said. “And they’ve said many times they were going to address it, and they haven’t.”

Should the bill become law, however, the uncertainty does not immediately come to an end. Though various gig economy firms have opposed the law, as its passage has seemed to become more likely, they have also toned down the rhetoric about how damaging it will immediately be.

“If AB 5 passes, it’ll simply be a qualification of existing law. It doesn’t immediately transform drivers into employees,” Uber CEO Dara Khosrowshahi noted during Uber’s earnings call last month.

There are also signs that if the law is passed, the gig economy’s biggest players will attempt to push back. According to reporting in the Los Angeles Times, the ride-hailing companies have pledged they will spend $60 million to fund a 2020 ballot measure that would create an entirely new classification for gig economy drivers – and delivery service DoorDash says it will contribute to the effort. That move is not Uber or Lyft’s first choice, but it will be their next play if AB 5 goes through.

The bigger question is how other states will react if California makes such a major change to its labor laws – and whether this will be an isolated incident or the first of many dominoes to fall.