August 12, 2020
The Latest Californian Legislation Affecting Employers and Gig Workers
Posted by Jenn McCabe
Fair warning: skip to the last paragraph if your organization does not employ workers in California.
The definition of an employee in California changed in early 2018, when the California Supreme Court decided the Dynamex Operations West (Dynamex) case. Assembly Bill 5 (AB5) is the formalized adoption and expansion of the Dynamex ruling. It was signed into law September 2019 and became effective January 1st, 2020. AB5 was immediately challenged by Uber and Lyft, who treat drivers as independent contractors, not employees.
On August 10th, the California Supreme Court issued a preliminary injunction confirming that Uber and Lyft must comply with AB5.
Uber and Lyft argue that the workers are independent and do not contribute to their core product, which they market as a disruptive technology platform. That doesn’t align with the industry provisions that govern their business as providers of transportation: the judge was not convinced by marketing materials. Uber and Lyft are using an older test to classify their workers, based on the Borello and Sons (Borello) court decision from 1989. The Borello test relies on several factors used to determine the degree of control an employer exercises over the worker. Using Borello, one can argue the drivers use their own equipment and exercise a high degree of control over their work. On the other side of this argument, some drivers argue they don’t earn minimum wage or have access to protections and benefits. In other words, flexibility doesn’t equate to independence.
AB5 holds employers to a new standard, and presupposes workers are employees in the absence of documentation proving otherwise.
For most employers who have adopted the new worker classification standards, this will not have a large impact. However, for those who’ve been holding out hope, it’s time to weigh the cost of compliance against the risk and cost of a California Employment Development Department (EDD) audit. The EDD audits are time consuming and expensive. They can be triggered by several factors; often it’s an unemployment claim, or a 1099-MISC document that lists a name and social security number rather than a Federal Employer Identification number.
AB5 clarified worker classification methodology and arrived at just three tests, all of which must be satisfied. For a worker to be considered a contractor, they must
- Be free from the control and direction of the hiring entity (the Borello test in brief)
- Do work that is outside the usual course of the hiring entity’s work, and
- Be established in a trade or business similar to the work being performed/provided.
No doubt Uber and Lyft have more to say on this topic; they have ten days to appeal. And in November, several companies who rely on gig-workers, including DoorDash, have funded a measure on the ballot to keep workers classified as independent contractors. With unemployment claims skyrocketing, allstates are eager to tighten up worker classification rules. Though some still resort to the federal or Borello test, many are considering AB5-like legislation. Organizations are advised to stay vigilant and keep abreast of changes. We will issue a state by state summary of recent court decisions in the coming days.
Jenn has more than 25 years of outsourced accounting and finance experience, with a particular expertise in startups and the advertising and creative production industries. She is passionate about seeing companies utilize the latest accounting technology to maximize their efficiency, productivity, and ultimately, success.
Before joining Armanino, Jenn founded and led Team Jenn Corp., a firm dedicated to the strategic financial management of startups and small businesses, offering a comprehensive back office solution with accounting, finance and HR solutions. Previous roles include stints at advertising giant Ogilvy and Mather, and in the cash management industry.
Jenn has a bachelor’s degree in economics from Pepperdine University and is a member of several professional associations including the National Society of Accountants, ProVisors and the Women’s Business Enterprise Network.