California’s Gig Economy Bill Could Spell Trouble for Tech Apps & Consumers

California’s Assembly Bill No. 5 (AB-5), known as the “Gig Economy Bill”, was viewed by many as an important and necessary step to protect the lives of working people, but the bill is already creating problems for Tech companies, their employees, and even consumers.

A “gig economy” is a labor market characterized by the prevalence of short-term, temporary, and independent contracts.  While it is true that independent contractors have always been a part of the modern U.S. economy, the startup market can be credited with the recent boom of the new-age working style. Companies like Uber, Lyft, WAG, and Postmates, to name a few, rely on independent contractors as their main workforce.

Workers classified as independent contractors do not qualify for minimum wage, overtime pay, or unemployment insurance, and furthermore, are not afforded any of the protections provided by the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act. Companies that utilize the gig economy model are able to save a ton of money on cost of labor, which has in turn allowed many tech startups to boom. California has long been a hub for such startups, and for a while it sought to protect them at all costs, but recently worker’s rights advocates and lawmakers decided to re-engineer the current gig economy to better serve working people.

AB-5 was introduced as a way to codify a recent landmark California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court. AB-5 changes California’s current worker classification system, applying a strict “ABC” Test that allows a worker to be classified as an independent contractor if:

    • the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work
    • the worker performs work that is outside the usual course of the hiring entity’s business
    • the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity

The company has the burden of proof under the “ABC” test, and if they can meet that burden they will be able to retain the independent contractor classification. Several gig companies have expressed confidence that they can “beat” the “ABC” test. Their premise rests on the idea that their companies act as devices to connect supply and demand, meaning for example that Uber’s “usual course of business” is connecting drivers with riders, not actually driving, and therefore the drivers are not operating within the usual course of the hiring entities business. Whether or not this premise is flawed has yet to be tested.

Early indications show that it is more likely the “ABC” test will force many companies that rely on the current gig economy to reclassify their independent contractors to full time employees. While AB-5 includes exceptions for a range of almost 50 industries including doctors, lawyers, dentists, and even journalists and photographers (so long as they don’t contribute too much to one publication), the exceptions do not extend to many of the technology apps that utilize the gig economy.

California has extensive employee protection legislation and when AB-5 takes effect in January 2020, companies like Uber, Lyft, and Doordash will face an estimated 20% to 30% increase in labor costs under the new classification system. This shift in the law could will assuredly make an impact on their bottom lines, and could end up being detrimental to their business models. The three companies have each proposed a referendum on the decision and have collectively put close to a billion dollars aside to lobby for it. In a statement after the bill was passed, Lyft said: “We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need.”

Supporters of AB-5 claim the bill will help remedy income inequality and improve the lives of living people, the bill will require companies to pay minimum wage, provide insurance, and many other benefits that are required under current labor law. Additionally, the reclassification will allow the ride share drivers and delivery people to unionize and advocate for themselves, something they did currently don’t have the power to do.

Conversely, opponents of the bill argue that it is taking a much too strict approach to the labor issues at hand. AB-5 will require companies to have more oversight over the newly classified employees, and likely require them to work more normal hours to make the uptick in costs worth it. For many gig economy workers, specifically those in the tech app space, the freedom of the job is the precise reason they utilize the employment opportunity.

It is much too early to predict the how AB-5 will be challenged, but with such passion on both sides of the issue it is safe to presume that tech companies are gearing up for a big fight.

Katie Dixon

October 2, 2019