California Assembly Bill 5 (AB5), dubbed the "gig worker bill," took effect on Jan. 1, 2020, requiring corporations to categorize independent contractors as employees.
What Is the Gig Economy?
The gig economy is centered on contract-based, transitory, freelancing, or independent contractor employment, and it often includes engaging with clients or consumers via an internet platform. It may be to the advantage of employees, companies, and customers by making work more flexible to the present moment's requirements and the need for flexible lives.
When conventional economic connections between employees, firms, and customers are weakened due to the rise of the gig economy, it may have unexpected effects on all parties involved.
Lorena Gonzalez-Fletcher and Todd Gloria drafted AB 5, and Governor Gavin Newsom signed AB 5 into law in September 2019. It took effect on Jan. 1, 2020, and compelled corporations to reclassify independent contractors as employees, with exceptions. The California legislature approved Assembly Bill 2257 in September 2020, which revised AB5 standards and exempted several employment classifications.
Assembly Republicans urged Governor Gavin Newsom to delay AB 5 or exclude independent truckers from the ABC test. The Supreme Court dismissed hearing a lawsuit challenging AB-5 on June 30, 2022, putting it on a fast track for enactment in California.
What Is the ABC Test?
California's AB5 is built on a verdict from 2018's Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. The California Supreme Court held in the 2018 Dynamex case that companies must follow the ABC test to categorize individuals as employees or independent contractors. This test implies that workers are employees unless their employer can establish three tests:
- Firstly, the worker is free to render services without the direction or control of the company.
- Secondly, the worker performs work tasks outside the usual course of the company's business activities.
- Thirdly, the worker is customarily engaged in an independently established occupation, trade, or business of the exact nature involved in the work rendered.
This test raises the bar for confirming independent contractor status in California. ABC 5 makes this test a government- requirement. But it was meant to regulate companies such as Uber, DoorDash, and Lyft that hire gig workers in great numbers.
Uber and Lyft opposed AB 5's requirements, but on August 10, 2020, California Superior Court headed by Judge Ethan Schulman, directed the companies to reclassify their contract drivers as employees; That offered them worker's compensation, paid sick leave, unemployment insurance, and health insurance. The action was brought by the California Attorney General, Los Angeles, San Francisco, and San Diego City Attorneys.
AB5 Impact on Independent Contractors.
AB5 transformed several independent contractors into employees. The essential component for gig firms is "B," which states that anybody executing services for a company that is the same as its business is considered an employee, providing reimbursement solutions for organizations with mobile-enabled workers.
If companies identify gig workers as employees, they will be entitled to a minimum income, rest breaks, health insurance, expense reimbursements, and other benefits under California law. The law levels the level of competition between gig workers and conventional employees.
Gig workers who are recognized as employees may face drawbacks if they must conform to new work rules. They may decide when and when not to work as a gig worker.
- It equalizes gig workers and regular employees.
- Minimum income, benefits, and other privileges are guaranteed.
- Reclassified personnel may lose scheduling flexibility.
- Reclassifying expenses might increase pricing.
Until an employee, a former gig worker, may lose that option, as these workers are attracted to this type of employment and flexibility and may not enjoy set schedules or other regulations and obligations. AB5 doesn't prohibit flexibility.
Employers may decide to exercise more control if they pay more for workers instead of contractors. Many Californians can't work as independent contractors, even though it's more lucrative. AB 5 makes these independent contractors employees, giving them benefits.
Now, controversial legislation will hinder 70,000 truckers' ability to transport goods and services. Since the Supreme Court didn't hear the case, these 70,000 trucker owner-operators must follow AB 5. According to Bloomberg, under Assembly Bill 5, workers who fail the ABC test will no longer be categorized as independent contractors and should be recognized as employees.
The trucking sector depends on independent contractors, who, until recently, have had the freedom to do business on their terms. For years, the trucking industry has made efforts to be excluded from state restrictions because of this need.
Following the Supreme Court's decision on June 30, 2022, not considering a lawsuit challenging the law that establishes the criteria for employment status categorization (AB5), truck owner-operators in California are now required to comply with the law.
2019's AB5 bill targeted Uber, DoorDash, and Lyft. The new laws exempted gig-worker companies, musicians, freelance writers, and architects. A temporary order suspended AB5 for truck owner-operators. The Supreme Court denied the trucking industry's complaint, revoking the order on June 30, 2022.
Due to AB5's conflicting implementation, companies may have to reduce their contracts with owner-operator fleets or hire erstwhile contractors as staff drivers by July 7, 2022.
The AB 5 Bill was badly timed. Back-to-school, festive holidays, and agricultural commodities are shipped now. Dockworkers and railroaders are negotiating contracts simultaneously. Post-pandemic supply-chain disruptions and inflationary pressures could cause more transportation inefficiencies.
These California employment laws now apply to 70,000 truck owner-operators, the backbone of the state's transportation economy. In the nation's largest container port, drivers who don't want to be employees or pay for operating authority will likely leave the market, creating another barrier in an already pressured supply line.
Companies that provide ridesharing and delivery services, such as Uber, Lyft, and the truck industry, were brought to the forefront due to AB5. Some analysts had predicted that the expense of reclassifying gig workers as employees would drive both companies to the verge of going bankrupt, rendering the business model based on gig workers redundant.
Suppose businesses want to maintain their sales and profits. In that case, the increased expenses associated with reclassification will likely be passed on to the customers who use their products and services.