Will Assembly Bill 5 Destroy the Gig Economy?

An end-of-session legislative fight has huge implications for companies and their contractors

Back Web Only Aug 22, 2019 By Steven Yoder

A momentous Supreme Court decision. A presidential candidate weighing in. A noisy late-August demonstration outside the Capitol. Not Washington, but Sacramento. Not abortion or guns — Dynamex.

The April 2018 Supreme Court decision in Dynamex Operations West v. Superior Court of Los Angeles County set stricter rules for how companies use contractors. Since then, many businesses have waited to see how the state legislature would respond. 

We’re about to find out. A bill being furiously negotiated — Assembly Bill 5 — would codify the court’s strict ABC test for determining who is a legitimate contractor, with huge implications for the gig economy and employers who use contractors more broadly. The situation, says Amelya Stevenson of Granite Bay human resources consulting firm e-VentExe, is a “hornet’s nest.”

What’s ABC? Think A for “autonomous,” meaning the worker must be free from “control and direction” by the employer over how and where they do the work, in the words of the court. B is for “boundaries,” with the work the contractor does required to be outside the employer’s “usual course of business.” And C is for “company,” as in the contractor must have a real one; they need to be “customarily engaged in an independently established trade, occupation, or business.” To be legit, the employer’s contracting arrangement has to prove all three.

The penalties for getting it wrong most definitely qualify as more than a slap on the wrist: The employer who incorrectly classifies has to pay the unpaid state income tax, unemployment insurance and disability insurance that it should have paid were the contractor an employee. The IRS can charge back FICA and payroll taxes. And the employer could get a year in jail.

Dynamex has split opinion among companies and contractors. Capitol Weekly reported that some exotic dancers sued their clubs to force them to follow the ruling and hire them as employees. Other dancers hate the decision and want to stay independent and so have left the state. In late July, the Sacramento Business Journal reported that a local public relations firm has stopped using independent graphic designers. But the News & Review publications (in Sacramento, Chico and Reno) continue contracting with freelance writers (full disclosure: Comstock’s also uses freelance writers and photographers).

AB 5 passed the Assembly in May and now sits in the Senate. Industry associations are crowding in to demand exemptions. To date, seven job categories have been carved out, including insurance agents, securities broker-dealers, real estate agents, salespeople, several occupations in the hair- and skin-care industries, and others. Also exempt are those working under a contract or subcontract to another company — think temp agencies and construction subcontractors. And anyone providing “professional services” — defined as those who have certain licenses (lawyers, dentists, and several others), those who have certain advanced degrees, and freelance writers, graphic designers and grant writers — also are off the hook under the current version of the bill. 

Left out in the cold are many others, including translators, travel agents, IT contractors, business consultants, drivers for companies like Uber and Lyft and independent truckers. On Aug. 13, dozens of big-rig owner-operators drove around the Capitol in an 18-wheel protest.

On the other side is Massachusetts Senator and presidential candidate Elizabeth Warren, whose state passed amendments in 2004 that mandate the ABC test. In an Aug. 14 Sacramento Bee editorial, Warren argued that “carving up (AB 5) with scores of exclusions only serves to weaken protections for millions of workers who need it.” She calls the ABC test straightforward and simple and says her state’s experience shows it’s been effective.

Management-side employment attorneys in Massachusetts disagree, claiming it’s more complicated than that. James Bucking, a Foley Hoag partner in the law firm’s Boston office, says the state has seen a lot of litigation over Prong B, the “usual course of business” rule. That makes it risky, for example, for a law firm to bring on an independent lawyer as a temporary contractor to meet workload on a busy trial. Bucking says 15 years after the law’s passage, it’s still not clear where the Prong B line is drawn.

Michael Gamboli, another employer-side attorney who represents Massachusetts companies, says clients approaching him and other employment lawyers about hiring independent contractors hear a consistent message: “Be careful of any kind of independent contractor situation. It’s almost impossible to hire an (individual) independent contractor in Massachusetts.” Companies are on far safer ground if they contract with another company that has its own employees, he says.

As for how Massachusetts enforces the law, Bucking says not much has changed. The state attorney general’s office is responsible for enforcement. It’s mostly confined itself to clear cases of abuse that would have been cited under the old, less-stringent rules — like a company that hires a janitor as an independent contractor who clearly should be treated as an employee, he says.

The report of a task force put together by global management law firm Littler claims the Massachusetts law brought on a wave of litigation, shortly after it took effect, against industries that traditionally used contractors. That’s resulted in some companies closing their operations in the state or shutting down altogether, the task force notes. But the report relies on anecdotal accounts by task force members and cites no data or studies of the law’s impact on the state’s economy.

Sacramento management-side attorney Julia Jenness, a shareholder at BoutinJones, says the Dynamex decision already has forced many California firms to restructure their contracting. They’re bringing on contractors as employees, hiring staffing firms and subcontractors, or working through professional employer organizations. She thinks the bill ought to pass because its exemptions will improve the contracting landscape. “It protects people for whom there’s a sufficient understanding of how that industry works, as opposed to the industries where there’s been historic abuse,” she says. And Gamboli thinks the AB 5 carveouts make sense, “Part of the issue with the Massachusetts statute is it’s over 10 years old,” he says. “I don’t think it really anticipated the gig economy.”

In an Aug. 14 update, Littler notes that people familiar with the legislative process in Sacramento are confident the bill will pass the Senate. For his part, Gov. Gavin Newsom has expressed no opinion — he’s squeezed on the issue between tech leaders and organized labor, by one account.

He may soon have a momentous decision. Unlike lots of businesses, he won’t need to contract with outside experts to help him make it. 

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Visitor (not verified)August 22, 2019 - 1:41pm

I fail to understand why calling something a part of the gig economy makes it okay to use independent people to do jobs that other employers have to call employees and pay appropriately. In your article you say janitors are clearly employees, yet you say just as easily that a doctor or an attorney is not. What is the difference between an attorney who provides his or her services to a law firm for their profit and a janitor who provides his or her services to a cleaning company for its profit? Both work for a living and should be treated equally under the law and receive the same protections. It is obvious that California is pandering to those with lots of dollars while, it appears, Massachusetts acted fairly across the board.

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