On Monday, August 10, 2020, a California judge declared that Uber and Lyft have refused to comply with Assembly Bill 5 and ordered them to reclassify drivers as employees. This ruling is a significant blow to many gig economy companies who rely on independent contractors for their operations.

Assembly Bill 5

A new state law that’s been in effect since January 1, 2020, the AB5 codifies the “ABC” test, which determines whether a worker is an employee as opposed to an independent contractor. The test states that for the hiring entity to classify a worker as an independent contractor, it must demonstrate that all the following conditions are satisfied: 

1. The person is free from the control and direction of the hiring entity in the performance of the work.
2. The person performs work that is outside the usual course of the hiring entity’s business.
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Essentially, if gig economy workers like drivers were classified as employees under AB5, they would qualify to receive benefits, such as minimum wage, overtime compensation, paid rest periods, reimbursements, health insurance, and paid sick and family leave. But as independent contractors, these drivers do not receive any of these benefits.

Independent Drivers Are Employees

The main argument brought forth by these companies has been that they are technology platforms rather than transportation services and that drivers “aren’t core” to their business. But California Superior Court Judge Schulman found that neither Uber or Lyft would be able to satisfy the part “B” of the “ABC” test. He wrote, “It’s this simple: Defendants’ drivers do not perform work that is ‘outside the usual course’ of their business.” 

The companies also argued that reclassifying drivers as employees would be a costly endeavor that would practically redefine their business model. In response, Judge Schulman noted that the low ridership rates due to the pandemic presented an opportunity to rebuild their services around adhering to the AB5. In addition, he stressed that any costs that Uber and Lyft had to endure to comply with the law were outweighed by the harm to the drivers and workers being deprived of the “basic rights and protections to which employees are entitled under California law.”  

This ruling does not automatically convert drivers into employees and, instead, was stayed for 10 days to allow for an appeal. Both Uber and Lyft said they plan to appeal, and in the meantime, have decided to shut down their services in California.

Furthermore, Uber, Lyft, and other gig companies in the food delivery sector are backing a ballot initiative, called Proposition 22, in the upcoming November general election ballot. Prop 22 aims to establish the companies’ gig workers as a separate class of workers with benefits, exempting them from the employment requirement of AB5.

Next Steps for Employers

These recent developments illustrate how critical it is to ensure the proper classification of workers. Employers should engage legal counsel to assist with an independent contractor analysis and to craft independent contractor agreements that clearly demonstrate the contractor meets the applicable standards to avoid potential litigations.

If you need any assistance with an independent contractor analysis or crafting an independent contractor agreement, contact Hackler Flynn & Associates.

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