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Gig economy companies with operations in California are on notice that they may have to treat workers as employees rather than independent contractors and offer them benefits such as workers compensation coverage.
With Gov. Gavin Newsom signing legislation Wednesday that gives companies such as those operating rideshare or food delivery business legal parameters for establishing whether a worker is an employee, at least one other large state may soon follow California’s lead, according to experts.
The trend will create “a lot of problems” for employers who rely on workers that have long been considered independent contractors, said James Fessenden, a partner in the San Diego office of Fisher Phillips LLP, which represents employers nationwide.
New York Gov. Andrew Cuomo addressed the issue in a recent press conference, stating that lawmakers there “have to look at how we define employee vs. independent contractor going forward.”
“Forget the specifics, more people should be considered employees because what has been happening is companies have been going out of their way to hire independent contractors to get out of those (employment law) obligations,” he told reporters on Sept. 9.
In California, employment lawyers say companies are bracing for change. Gov. Newsom signed A.B. 5, which overwhelmingly passed the state Senate on Sept. 10 and the Assembly on Sept. 11.
“I think employers need to take a real hard look at how they classify their workers and make an honest assessment where they fall and where the gray area is, and whether they are ready to accept the risk of arguing before a court,” said Michael Warren, San Jose, California-based partner and head of the employment practice with McManis Faulkner P.C., which represents employers.
A.B. 5 codifies a controversial California Supreme Court decision on the definition of an independent contractor: Dynamex Operations West Inc. v. Superior Court of Los Angeles County, in which delivery drivers successfully sued Dynamex, claiming that the delivery company had misclassified them as independent contractors rather than employees, violating California wage and worker laws, according to court documents.
A.B. 5 would presume a worker is an employee unless an employer satisfies a three-factor test, and would affect those working in the gig economy, according to a legislative analysis released with the bill.
The test — known as the “ABC test” and borrowed from statutes in Massachusetts and New Jersey — is summarized in the latest draft of the bill: “(A) person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation or business.”
The bill will help clarify a longstanding argument in California courts, according to Mr. Warren. “The issue of the misclassification of employees in California has always been an issue even before the Dynamex case,” he said, adding that the increase in gig economy services fueled legal changes. “It’s going to be a challenge in Silicon Valley” where many app-centered companies are headquartered. “Everybody is talking about Uber and Lyft, but it is going to affect all industries.”
Tony West, chief legal officer for San Francisco-based Uber Technologies Inc., told reporters on Sept. 11 that A.B. 5 itself creates more confusion — and that its drivers may still pass the test as independent contractors.
“We expect we will continue to respond to claims of misclassification in arbitration and in court as necessary, just as we do now. But we will also continue to advocate for the independence and choice that drivers tell us again and again in surveys, polls, focus groups and personal conversations that they value most.”
Uber and its San Francisco-based competitor Lyft Inc., along with San Francisco-based meal delivery firm DoorDash Inc., late last month pledged a combined $90 million to introduce a ballot initiative to establish a new classification for drivers. Mr. West told the reporters their proposal will include guaranteed minimum earnings and “access to robust portable benefits like sick leave and injury protection,” among other benefits.
In endorsing the forthcoming initiative, a spokesman for Lyft wrote in an e-mailed statement on Sept. 11 that the “political leadership missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits.”
The Lyft spokesman also alluded to exempt job titles listed on the bill which, according to the latest draft, include “licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.”
“The fact that there were more than 50 industries carved out of AB5 is very telling,” the Lyft spokesman wrote.
A DoorDash spokesperson also released a statement, saying it is “committed to passing a new law… that would create benefits and protections for Dashers, including a guaranteed minimum wage with the opportunity to earn more, access to benefits, and protections against discrimination and sexual harassment.”
(This story included an incorrect citation to an appellate court decision. The name of the case is Gerardo Vazquez, Gloria Roman, and Juan Aquilar v. Jan-Pro Franchising International Inc.)