California and the Gig Economy: The Fight Over AB-5

By David Kramer, Senior Associate

Mar 3, 2020

California employers beware: as of January 1, 2020, it is increasingly likely that any person who performs services for your company will be classified as an employee. The reason for this seismic shift is Assembly Bill 5 (AB-5). Under AB-5, a person will be considered an employee, rather than an independent contractor, unless the hiring entity can prove each of the following elements of what is commonly referred to as the “ABC Test”:

• (A) The person 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
• (B) The person performs work that is outside the usual course of the hiring entity’s business.
• (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The ABC Test is designed to presumptively classify all workers as employees. Indeed, under this exacting standard (and absent certain occupational exemptions) any individual who performs services that fall within the hiring entity’s core business will be classified as an employee. In fact, a state court judge in San Diego recently granted the City’s Attorney’s motion for preliminary injunction seeking to require Instacart to comply with AB-5. Citing the ABC Test, that court—though conceding that “there is room for debate on the wisdom of this [new law]”—concluded that Instacart Shoppers should be classified as employees, given that they “perform a core function” of the business, are not free of control of the hiring entity, and are not engaged in an independently established trade, occupation, or business.

This marks a major change under California’s labor laws: the Uber drivers, Instacart shoppers, and Postmates deliverers previously classified as independent contractors are now considered employees. And, as employees, these workers are now legally entitled to the core protections and benefits enshrined in California’s labor laws, such as minimum wage, overtime pay, workers’ compensation and unemployment and disability insurance.

Cannabis companies are not immune to this reclassification. For example, if a vertically integrated cannabis company hires a “consultant” to help with the company’s California cultivation or manufacturing operations, that consultant will likely be considered an employee, not an independent contractor. After all, the consultant is performing work that falls within the company’s usual course of business.

Given its sweeping reclassification of large swaths of California’s labor pool, AB-5 has been mired in controversy. Uber and Postmates immediately filed suit seeking to enjoin California from enforcing AB-5. Their preliminary injunction was denied. Non-Gig Economy participants have quickly followed—in some instances with greater success. For example, the California Trucking Association (CTA), an association of licensed motor-carrier companies whose members contract with operators as independent contractors, successfully moved to preliminarily enjoin California from enforcing AB-5 against motor carriers—meaning that, for now, California cannot enforce AB-5 against the trucking industry. Somewhat ironically, California cannabis distributors and retail delivery operators are already required to designate their drivers as employees.

The impact of AB-5 has undeniably been felt outside the courtroom, as businesses, big and small, are now grappling with the law’s impact and ramifications. As just one example, the Lake Tahoe Music Festival—which has operated for more than forty years—recently announced that it will shut its doors this summer, because “New CA employment law AB-5 requirements add to the challenge of meeting our financial goals and create the final stressor on our small non-profit organization.” Other local community theaters have made similar announcements.

Given its challenges and controversies, AB-5 will likely be subject to additional changes in the future. In fact, according to the LA Times, 34 separate pieces of legislation related to AB-5 were introduced in the California legislature in January and February. In addition, Uber, Lyft, DoorDash and other Gig Economy behemoths have vowed to overturn AB-5 via referendum in November—and have apparently raised over $100 million in support of that effort.

For now, however, AB-5 remains the law of the land. That means hiring entities must be careful to ensure that they either hire workers who satisfy the rigorous ABC Test (and may, therefore, be lawfully classified as independent contractors), or ensure that such workers are afforded all benefits and protections of California’s famously pro-labor labor laws. It also means that “independent contractor” or “relationship of the parties” provisions in your contracts—which are so often glossed over—demand careful attention and reconsideration. This is particularly important insofar as courts have been explicit that they will afford no deference to the specific label ascribed to a worker in his or her contract. Meaning, if a worker cannot truly satisfy the substance of the ABC Test, it does not matter that that worker’s contract refers to him or her as an “independent contractor.”

California operators are advised to consider how AB-5 may impact their contractor relationships and to continue to monitor the litigation and potential reforms surrounding AB-5 as this area of law continues to rapidly develop.