Gig Economy Under Threat as California Senate Approves Landmark AB5

Companies like Uber and Lyft may be required to treat their contract workers as employees under the terms of a new bill approved by the California legislature on September 10. The bill, known as AB5, has now passed the State Senate and has the support of California Governor Gavin Newsome, who pledged support for the bill in an op-ed in The Sacramento Bee and is likely to sign it into law if it passes the State Assembly.

The new bill, first introduced in 2018, seeks to codify the ruling in Dynamex Operations West, Inc. v Superior Court of Los Angeles which established that Dynamex incorrectly classified its workers as 1099 independent contractors.  For companies, bringing on independent contractors allows them to avoid payroll taxes, overtime, and benefits including a guaranteed minimum wage, workers’ compensation, and unemployment. These savings have hitherto allowed companies like Uber and Lyft to thrive by offering consumers a cheaper alternative to the traditional taxi. It has also given employment opportunities to thousands of workers not only in the United States but around the world.

According to the ABC test for independent contractors in California, for a worker to be truly independent they must satisfy the following points:

  • Part A requires that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • Part B requires that the worker performs work that is outside the usual course of the hiring entity’s business;
  • Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed; and
  • The contractor must actually be in business for themselves.

The bill, if signed into law, will greatly affect companies like Uber, Lyft, Doordash, Postmates, and Instacart, which see it as a threat to the future of their businesses and lobbied against its passage.

Whatever happens in California, the expectation is that such changes will sweep across the country, forever changing the gig economy and the disruptive companies that built their businesses on the back of it.

No matter what side the argument you find yourself, Rooney Nimmo has lawyers who specialize in employment matters and California law. If you need assistance or have any questions, please contact us here.

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