Employees, Assemble!: California passes Assembly Bill 5, a landmark bill on gig economy rights

September 25, 2019

3 min read

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What's going on here?

On Wednesday 18th September the Governor of California signed into law “Assembly Bill 5” (AB5) which provides a new test for worker classification. This means that many independent contractors will now be considered employees and will therefore be entitled to employee benefits such as sick pay, minimum wage, and holidays.

What does this mean?

Due to come into force on January 1st 2020, the bill will affect firms such as Uber, Lyft and numerous food delivery companies based in California which employ workers on a gig style basis. The current business model of such companies, the gig economy model, means workers are employed as independent contractors because they accept work on a per job basis. The bill could put an end to this as it introduces a new three part test of employment status. The test provides that a worker is considered to be an employee if;

1) Their job forms part of the company’s core business, 

2) They are under the companies control, and 

3) Do not have an independent business in the industry. 

Under such a test those currently considered to be independent contractors would then be classified as employees. It is generally thought that this new test would provide the workers with basic protections and benefits such as the right to sick pay, however some argue that this undermines the flexibility of the gig economy.

What's the big picture effect?

The new bill will raise the bar for companies across a multitude of industries which rely on independent contractors and will change the way in which they engage with their workers. For companies already under strain (Uber for example lost more than 5 billion in the last quarter) the legislation is likely not welcome news as it has been estimated that treating their workers as employees will increase costs by as much as 30%. Therefore it is not surprising that Uber and Lyft have teamed up to try to gain an exemption. Uber has been successful in fighting similar legal action in the past. 

Employment lawyers will be called upon to consider whether, in differing and complex industries, a worker is to be classified as an employee or an independent contractor. Lawsuits will therefore likely arise over the specific language of the legislation and the unique characteristics of a particular client and situation.

One would be mistaken for thinking that because this bill is local to California, it will not have a large impact. However, California has often led the way in introducing legislation which is later adopted elsewhere in the US, and thus we could see this test become the new standard. Indeed, similar thinking has already been seen beyond the US. In the UK, Uber recently lost an appeal last year in which it fought to continue considering workers as independent contractors. Further, the UK government recently proposed to expand on its reforms on gig economy compensation (see our article on that here), further showing how governments other than the US are addressing the gig economy issue.

Therefore, it appears that this US bill signifies a global shift in the approach to employment, a trend which companies who are reliant on gig economy business models will be keen to fight. The success of their legal action against such changes may be instrumental in shaping employment contracts in the future.

Report written by Julie Lawford

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