On January 1, 2020, AB-5 went into effect in California. The law, which had gig workers such as Uber and Lyft drivers squarely in its sights, sought to extend the benefits of a W2 employment relationship to a wide swathe of freelance workers. To do so, it imposed a stringent test—one that is, by design, nearly impossible for companies in the gig economy to meet—to determine whether workers are truly independent contractors for purposes of the California Labor Code. Called the “ABC Test,” it imposes a presumption that a person providing labor or services for remuneration is an employee unless the hiring entity can satisfy each of the following conditions:
(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; and
(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.
Of course, prong “B” immediately imposed a barrier that prevented many freelancers from working for clients in their own industry, particularly in the entertainment industry, which understandably caused quite a headache for California. That along with the general lack of clarity with AB-5 has led to multiple amendments, and currently a list of at least 100 professions that are exempt (some may say arbitrarily) from the law. Perceiving AB-5 as an existential threat to their existence, Uber and Lyft fought it vigorously. In addition to pursuing litigation that was ultimately unsuccessful, Uber and Lyft (along with other gig economy companies) threw over $220 million behind a ballot initiative called Proposition 22. That measure sought to carve out yet another exemption to AB-5 for app-based transportation and delivery drivers. It passed with 58% of the vote in November’s election.
Despite the chaos AB-5 created and Proposition 22’s passage, the Biden Administration intends to implement the “ABC Test” nationwide by “work[ing] with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws.” Should the GOP keep the Senate, this may thwart these intentions. But even in the absence of new legislation, the presumptive President-elect has promised to “direct the U.S. Department of Labor to engage in meaningful, collaborative enforcement partnerships, including with the National labor Relations Board (NLRB), the Equal Employment Opportunity Commission, the Internal Revenue Service, the Justice Department, and state tax, unemployment insurance, and labor agencies” to facilitate a large anti-misclassification effort based on existing law. In other words, employers, at the very least, can expect heightened enforcement and stricter regulatory interpretation of laws already on the books.
There are also certain executive actions the Biden Administration can take that could have a profound impact on businesses. For instance, the Department of Labor under the Trump Administration recently proposed a business-friendly rule to determine whether workers are employees under the Fair Labor Standards Act, which provides for minimum wages and overtime pay for employees. Called the “economic realities” test, this rule would primarily focus the inquiry on the extent of actual control a purported employer has over the worker, as well as the worker’s financial dependence on the business. The Biden Administration will almost assuredly withdraw this proposed rule or, if it goes into effect, issue an executive order rescinding it. On a related topic, and as we previously covered here, the NLRB under a Biden Administration would likely return to a “joint employer” test that focuses on a purported employer’s “indirect control” over a worker to determine if the worker is really an employee whereas the NLRB currently requires “substantial direct and immediate control.” This could pave the way for numerous independent contractors to organize collectively.
Regardless of how a Biden Administration will seek to affect a business’s ability to classify workers as independent contractors, all should be aware that, unlike California, there is no ballot initiative at the federal level to serve as a stopgap. As always, we will continue to monitor this issue and provide our readers with updates.