Accountability for Employers or Independence for Contractors? Accomplishing AB5’s Labor Classification Goals in the Gig Economy

Authors

Chelsea Rauch

Abstract

U.S. employment law traditionally classifies workers as either employees or independent contractors; each worker under this traditional legal rubric can only be classified as one or the other—there can be no ambiguity or overlap. An employee is generally defined as “a person hired for a regular, continuous period to perform work for an employer who maintains control over both the service details and the final product.” In contrast, an independent contractor is generally defined as “a worker who performs services for others, usually under contract, while at the same time retaining economic independence and complete control over both the method by which the work is performed and the final product.” The classification as either an employee or an independent contractor depends on two factors: (1) the nature of the work performed for the employer and (2) the amount of control the employer exerts over that worker. The distinction between these two categories can be monumental and “has considerable significance for workers, businesses, and the public generally.” Independent contractors are neither governed by the Fair Labor Standards Act (FLSA), the National Labor Relations Act (NLRA), nor the Family and Medical Leave Act (FMLA) like employees, who “qualify for a range of legally mandated benefits and protections.” These employee benefits and protections include minimum wage, overtime pay, adherence to health and safety workplace requirements, retirement plans, health plans and benefits, the right to unionize, and certain protections from termination. Hirers are also obligated to comply with all state and federal regulations that govern an employee’s wage rate, the hours they work, and the working conditions an employee is subjected to; pay their portion of Social Security and a myriad of taxes related to the employment of a worker classified as an employee; and provide workers’ compensation insurance to each employee. However, businesses bear none of these burdens when hiring workers categorized as independent contractors because they do not receive the same labor law benefits and protections as employees. Businesses are also not responsible for paying independent contractors’ payroll taxes and are generally not liable for the negligent acts of its contractors. Clearly, employers stand to gain an overall competitive and economic advantage if they classify their workers as independent contractors rather than employees because they can skirt the mandatory protections employers are required to provide to their employees. Unfortunately, these economic advantages incentivize some employers to misclassify their workers all too willingly. On September 18, 2019, California Governor Gavin Newsom signed into law Assembly Bill 5 (AB5) in direct response to these misclassification issues, which amended California Labor Code Section 3351 and added Section 2750.3. AB5 was drafted and passed to “help ensure that California’s workers who perform core work under company control versus as independent businesses have access to basic labor and employment protections and benefits denied independent contractors” and “protect law-abiding businesses that properly classify workers from unfair competition from companies that cut costs by misclassifying workers.”AB5 has spurred controversy and debate since it was initially introduced by California Assemblywoman Lorena Gonzalez, and this controversy has only continued since the law came into effect in January 2020. In fact, in spite of the new law, Uber declared that it will proceed with business as usual and will not re-classify its workers as employees. The company, along with Lyft and DoorDash, launched a two hundred million dollar ballot initiative (Proposition 22) in California to classify app-based drivers as independent contractors—“the most expensive initiative” in the history of California. The initiative was approved by California voters in the November 3, 2020, general election, a result celebrated by tech company founders and reproved by legislators for the all-too-apparent control gig companies wield on “the future of workers.” With guaranteed political challenges to AB5 already underway, the California legislature (and other states that may follow California’s lead) must strengthen the statute’s language to better achieve its initial goal of protecting workers from misclassification. While the ABC test is an effective starting point to prevent misclassification, the statute’s language—particularly prong C of the ABC test—could prove to be the statute’s Achilles’ heel. This Note considers how AB5 has updated the definition of employee and independent contractor under California statutory law. It compares California’s new law with federal employee classification standards and explores the benefits and detriments of the ABC test as seen in other states’ legislation. Further, this Article examines the gig industry’s response to both sides of the debate: supporting or opposing the law. Lastly, it proposes a potential remedy to AB5’s weaker language regarding prong C of the ABC test.

Recommended Citation

Chelsea Rauch, Accountability for Employers or Independence for Contractors? Accomplishing AB5’s Labor Classification Goals in the Gig Economy, 44 SEATTLE U. L. REV. 563 (2021).