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Who’s an Employee in California? Worker Classification Explained

Jan. 31, 2020, 2:35 PM

A California law that makes it harder for gig-economy companies, such as Uber Technologies Inc., and other businesses to classify their workers as independent contractors who aren’t guaranteed minimum wages, overtime, benefits, or other employment protections has again stirred the debate over the definition of employment.

The stakes of California’s law, also known as Assembly Bill 5, or A.B. 5, are high for companies, as it could disrupt the expansion and growth around business models that rely on contractors. Employers must either face higher labor costs by classifying their workers as employees, or risk an onslaught of lawsuits if they don’t meet the law’s standards.

1. Contractors or Employees?

A classic example of a contractor relationship is a plumber, who has an independent business and is hired to perform a service for another company. If the plumber sues the company for wage violations, that company could avoid liability by meeting the law’s requirements of a three-part “ABC test” to show that the plumber is a contractor, and not an employee.

The rise of the app-based gig economy and companies increasingly relying on contractors for core parts of their business has blurred the lines between employees or contractors. Companies, including media companies, tech giants, and corporations that run franchises, have been hit with litigation accusing them of misclassifying their workers as contractors to avoid paying minimum wages and overtime, or providing workers’ compensation, health care, or other employee benefits.

2. What’s the ABC Test?

Because federal and state laws have vaguely defined who qualifies as an employee, courts have developed different tests that weigh numerous factors to determine a classification. California’s ABC test, based on a 2018 state high court ruling, was intended to simplify classifications by focusing on only three factors.

Other states, such as Massachusetts, New Jersey, and Connecticut, have similar tests, while Illinois and New York are considering legislation to create similar systems. Several Democratic presidential candidates, including Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.), support these efforts.

3. What Are the Three Factors?

The three parts of the ABC test are:

  • Part A directs companies to prove how much control it has over the work performed. This aspect of the test is the easiest for employers that want their workers to be contractors. Gig economy companies argue they don’t exert control over their drivers by allowing them to set their own schedules, work for competitors, and never report to a boss or manager.

  • Part B says that a worker can’t be a contractor if the service performed is “within the normal course of business.” Some management attorneys have dubbed it the “Killer B,” because many companies use contractors to help with services for their core business. Drivers suing Uber argue that they perform duties in the normal course of business for a company that offers rides to passengers. The company counters, however, that they are a technology platform that connects the drivers to passengers, not a transportation company.
  • Part C requires the contractor to have an independently established role or business for themselves. Again, the plumber who has his own business would fit under this. But for a Lyft Inc. driver to pass the test, he or she would need an established trade, such as being a licensed barber or accountant, to be deemed a contractor.

4. What Are the Pros and Cons for Workers?

For many workers, the benefits of independent contractor status are freedom and control over their own time. As work relationships become more fluid, a worker may enjoy the flexibility of having multiple contracts or gigs, even if they receive no employment benefits, and ultimately not clocking in for a 9 a.m. to 5 p.m. job.

Freelance journalists groups are suing to block California’s new law, saying it prevents them from working for multiple publications and controlling how many stories they write each year.

The argument against these arrangements, however, is that the employer can essentially enjoy much larger profits without paying for expensive benefits and ultimately being liable for workplace violations.

5. What’s the Business Impact?

The ABC test has roiled affected businesses because they must either change their workers’ classification or potentially face litigation.

Gig economy companies, the trucking industry, and freelance journalists have sued to stop the law. Uber and others are also sponsoring a petition for a ballot measure to overturn the law.

Some employment attorneys say companies are weighing their options, and deciding what level of risk their current workplace structures pose. Companies that are changing their workers’ status to comply with the law still fear that competitors will gain an advantage by continuing to classify their workers as contractors.

Learn More:

Fight Over Who’s an ‘Employee’ in California Hits Critical Stage

California Companies Brace For Litigation After Labor Bill

Uber, Postmates Sue California to Block Gig-Worker Law

Cleaners’ Battle Could Boost Gig, Franchise Workers

California Classification Law Blocked for Truck Drivers

Freelancer Groups Can’t Halt New California Labor Law

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; Karl Hardy at khardy@bloomberglaw.com; Jessica Coomes at jcoomes@bloomberglaw.com; Adam Schank at aschank@bgov.com

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