Last Wednesday, the California legislature passed bill AB 5, a sweeping measure sure to impact the “gig economy” and any business that likens itself the “Uber of _____.” If signed into law (and the governor has already signaled his intention to sign it), AB 5 would require companies to re-classify as “employees” many workers who are currently classified as independent contractors, so long as they satisfy certain criteria. AB 5 is sweeping in its potential consequences, and is likely to impact a litany of app-based businesses, like ridesharing giants Uber and Lyft, as well as delivery apps like DoorDash and Postmates, and even Amazon, which uses delivery drivers for certain services like grocery delivery. AB 5 could force drastic change to these and other companies’ business models, requiring them to abide by state minimum wage laws, and to pay payroll taxes, premiums for workers’ compensation, Social Security, unemployment, and disability insurance for their employees’ benefit. Companies impacted would also need to provide their workers the ability to collectively organize under the protections of federal labor laws.

If the bill becomes law, it could be a bellwether for a shift in labor laws across the country. For example, presidential candidates Elizabeth Warren and Kamala Harris have endorsed AB 5, and New York Governor Andrew Cuomo has hinted at support for similar measures, stating in a recent press conference that “I don’t want to lag California in anything, I don’t want to lag any other state[.]”

The ABC Test

AB 5 codifies an April 2018 unanimous decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, that changed California employment law by adopting a clear test for who counts as an employee of a company.1 As described by the California Supreme Court “[t]he ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions”:

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

These ABC factors are also outlined in AB 5 and Uber has signaled that it will take the position that its drivers fall within this definition of independent contractor.

Gig Economy Giants Feeling the Heat

Nevertheless, AB 5 is sure to pose challenges for gig economy giants. Indeed, Uber noted in a recent disclosure statement filed with the SEC on April 11, 2019, that “[i]f, as a result of legislation or judicial decisions, we are required to classify Drivers as employees . . . we would incur significant additional expenses . . . [and] any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.” Uber would certainly not be alone in this regard. In fact, Lyft, Uber, and DoorDash have all pledged to spend $30 million each—$90 million total—to defeat AB 5 with a ballot initiative in next year’s elections if California Governor Gavin Newsom signs the bill into law.

What This Means For You

First, employers concerned about the application of the ABC test should consider and clearly define the nature of their usual course of business. For example, in prepared remarks delivered to the media last week, Uber’s General Counsel Tony West argued that Uber would satisfy the requirements of the ABC test, and its drivers could continue to be classified as independent contractors, because driving is outside of Uber’s usual course of business. Instead, Uber’s usual course of business “is serving as a technology platform for several different types of digital marketplaces.”

Second, employers must be aware that enforcement of AB 5 can come from multiple angles—that is, it’s not just independent contractors who might land a company in court. Large companies, and companies using a large number of independent contractors, should be aware that enforcement of the measure will not only come from individual employees seeking to enforce the provision, but also from the State of California and local entities. AB 5 explicitly provides that the Attorney General of California, and the city attorneys for large cities (cities of 750,000 or more), can file “an action for injunctive relief to prevent the continued misclassification of employees as independent contractors” and that this power exists “[i]n addition to any other remedies available[.]”

Third, employers impacted by AB 5 might consider limiting (or even eliminating), operations in California. Not all gig-based businesses are likely to be impacted by the law in the same way, and companies with smaller operations in California and more robust operations elsewhere might be able to weather the storm better than companies whose clientele is more concentrated in California. Employers must also stay apprised of developments in other jurisdictions as well, as the ABC test is already accepted in jurisdictions like New Jersey and Massachusetts, and could be adopted elsewhere if states like New York choose to follow California’s lead.