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California Senate approves AB 5; gig economy independent contractors may need to be employees

September 11, 2019

The California Senate passed AB 5 which puts in place the more strict “ABC” test for determining independent contractor compliance. This could make it more difficult for human cloud platforms such as Uber Technologies Inc. (NYSE: UBER),  Lyft Inc. (NASDAQ: LYFT) and others to classify their workers as independent contractors.

“Gig economy companies like Uber, Lyft and DoorDash may have to rethink their business models following Tuesday’s 29-11 California Senate vote in favor of AB 5,” law firm Carlson & Jayakumar LLP wrote in a tweet. “The bill would likely force gig economy companies to reclassify their workers as employees.”

The law codifies the California Supreme Court’s Dynamex decision which put the ABC test in place.

“It will make it very difficult to have independent contractors in California,” Staffing Industry Analysts’ President Barry Asin said of AB 5 in his keynote speech today at the Collaboration in the Gig Economy conference in San Diego.

Asin said there were polar opposite approaches to independent contractors as far as legislative approaches in the US with the federal government and red states tending to allow firms to use them while blue states are raising concerns about the use of independent contractors.

The California Chamber of Commerce writes that Uber and Lyft are trying to get new legislation before voters that would allow drivers to remain independent contractors. It’s also unclear what will happen to Uber and Lyft drivers and other independent contractors once the law takes effect Jan. 1 — whether they would remain independent contractors or not — and negotiations are ongoing.

“Democrats and labor leaders are working their way through this issue, which means even after AB 5 passes, negotiations will continue,” according to the chamber.

California labor attorney Michael Droke of Dorsey & Whitney said AB 5 has several exemptions for occupations such as licensed insurance agents, certain licensed healthcare professionals, registered securities broker-dealers, direct-sales salespersons, real estate licensees and others.

Droke said the law is intended to convert thousands of independent contractors to employees.

“Many industries rely on independent contractors to deliver products and services, from food delivery to software coding and design. Those workers will be converted to employees, significantly increasing the cost of the products and services,” he said. “All companies using independent contractors in California should review the relationship to determine if a limited exception applies. If not, then the company should review whether the worker is an independent contractor under both the ‘ABC’ and ‘economic realities’ tests.”

Employers who knowingly violate the AB 5 law could face criminal penalties, Droke said.

Some labor groups lauded the law.

“The misclassification of workers creates a corrosive effect that ripples through our entire economy, undermining our laws to protect and support working people,” according to a statement by the California Labor Federation.

“AB 5 is a powerful counter to the corporate greed and rampant exploitation that’s driving inequality across our state in emerging and traditional industries, alike,” it said. “This historic victory clears the way for the bill to become law, setting workers and their families on a path to a better future and ending abuses that are all-too-common.”

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