Employment Law in California Undergoes Sweeping Change with Passage of Assembly Bill 5

In what is expected to shake up the entire “gig” industry in California, Governor Gavin Newson recently signed into law a bill that rewrote the rules of employment law as it relates to using independent contractors in California. The new law, known as Assembly Bill (AB) 5, is expected to grant hundreds of thousands of workers new job benefits and pay guarantees across numerous industries including ride-hailing companies, trucking, janitorial services, nail salons, adult entertainment, construction, media, and healthcare.

Assembly Bill 5, which curbs businesses’ use of “independent contractors,” gained final approval in the state Senate and state Assembly, largely along partisan lines. Independent contractors, some of whom work for multibillion-dollar technology companies, are generally not covered by minimum wage, overtime, sick leave, family leave, or workers’ compensation laws. Nor do businesses pay into Social Security or Medicare for the independent contractors they retain.

The new law codifies and expands on a 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which adopted a new “ABC test” to determine whether a worker is properly classified as an independent contractor. The new “ABC test” replaces an 11-point test that had been in use in California since 1989.

Dynamex’s ABC test presumptively considers all workers to be employees, and a hiring business bears the burden of proving each of the following three conditions for the worker to be properly classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract for the performance of the work and in fact;
  2. The worker performs work outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The new bill effectively requires companies in various industries to reclassify independent contractors as employees. It also gives the state and cities the right to file suit against companies over misclassification, overriding the arbitration agreements that many businesses use to shield themselves from worker complaints.

After months of lobbying, the final law does exempt a number of occupations, but most notably it does not exempt those of Uber, Lyft, DoorDash, Postmates and other gig-based giants who poured millions of dollars into efforts to oppose or avoid the effects of the bill. Prior to the passage of the law, executives from the ride-hailing companies met with the governor’s top aides for months, trying to obtain support for a special employment category that would exempt their drivers from the impact of the bill. When those efforts failed, Uber and Lyft, along with DoorDash, pledged to devote $90 million to a committee for a ballot initiative that would create the separate employment category under the labor code, unless the California Legislature meets their demands in its next session.

The bill was not without its opponents in the legislature who claimed that the bill signaled the abandonment of a time when “California used to be a place where the entrepreneurial spirit was nurtured.” The California News Publishers Association too opposed the bill, running full-page ads claiming that it would put many newspapers “out of business.” Executives from Uber and Lyft each have stated that the bill poses a major threat to their businesses.

Uber’s chief legal officer, Tony West, however, claims that the new bill will not require it to reclassify its drivers as employees in California. According to West, Uber’s drivers are legitimately classified as independent contractors under the new law because they perform work outside the scope of Uber’s usual business as a technology platform.

Assembly Bill 5 goes into effect on January 1, 2021.

Our Elgin employment law, wage and hour, and non-compete agreement attorneys have more than three decades of experience representing individuals and businesses of all sizes, including small or closely held businesses for whom employment law can seem like a complex minefield of liability. Our employment and business dispute lawyers have defended high-level executives and represented classes of hourly workers in wage-violation cases. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

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