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California’s New Labor Law to Capture Gig Employees

Legislation introduced in California has passed the State Senate and is expected to be signed into law by Governor Gavin Newsom.

Freelance Writer / Business Consulting

Todd William is a freelance writer and former Managing Director of Wall Street Consulting Services in New York City, offering a wide range of strategic advisory services to corporate clients, including: risk management, public relations and marketing.
Todd William is a freelance writer and former Managing Director of Wall Street Consulting Services in New York City, offering a wide range of strategic advisory services to corporate clients, including: risk management, public relations and marketing.

The classification of an individual as either an independent contractor or employee has profound implications on the relationship between an individual and his or her employer. Under federal and state law, if an individual is classified as an employee, the employer is responsible for paying federal Social Security and payroll taxes, unemployment insurance taxes, state employment taxes, providing worker’s compensation insurance, as well as compliance with a significant number of rules and regulations concerning an individual’s wages, hours and working conditions.

The cost of compliance is high and the penalties and consequences for non-compliance is even higher. It is for these reasons that many businesses, especially those fueled by gig economy workers who enjoy a great deal of choice and freedom as to where, how much and when to work, have sought expanded flexibility in worker classifications. It has been estimated that classifying workers as independent contractors may save businesses 20-30 percent annually compared to hiring those same individuals as employees, so there are potentially billions of dollars at stake.

This flexibility is coming to an end, at least in California.

As a result of a landmark 2018 decision by the California Supreme Court, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the court set standards to determine whether a worker is an employee or an independent contractor. The Dynamex ruling established the “ABC test” to determine whether a worker is an employee or independent contractor and only allows for the classification of independent contractors if employers can verify that:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work

(B) that the worker performs work that is outside the usual course of the hiring entity’s business

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Based on the guidelines outlined in the California Supreme Court’s decision, legislation, Assembly Bill 5 (AB5), received final approval in the state Senate this week and was sent to Gov. Gavin Newsom for his approval. The Governor has already expressed his support. “Reversing the trend of misclassification is a necessary and important step to improve the lives of working people,” Newsom wrote in an op-ed published last week in the Sacramento Bee. “That’s why, this Labor Day, I am proud to be supporting Assembly Bill 5, which extends critical labor protections to more workers by curbing misclassification.”

The Internal Revenue Service (IRS) also has a stake in this debate, in the form of lost tax revenue, and has shared several relevant factors in determining whether an individual is an employee or independent contractor, with the key consideration being control:

Behavioral: Does the company control or have the right to control the worker as well as how the worker does his or her job? For example, if a company provides training for the worker, this signals an expectation to follow company guidelines and therefore indicates that the worker is likely an employee.

Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how a worker is paid, whether expenses are reimbursed, who provides tools, supplies, etc.). Only an independent contractor can realize a profit or incur a financial loss from his or her work.

Type of Relationship: Are there written contracts or employee-type benefits, e.g., pension plan, insurance, vacation pay? Will the relationship continue, and is the work a key aspect of the business?

The Department of Labor (DOL) uses an “economic reality” test to determine whether a worker is an employee or independent contractor for the purposes of receiving Fair Labor Standards Act (FLSA) benefits, such as eligibility for a Federal minimum wage, and the DOL has extrapolated seven key considerations from prior court decisions:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation

Regardless of the test chosen, the new state law will have significant implications for companies like Uber, Lyft, DoorDash and others. The California Chamber of Commerce has come out against the proposed law and lobbying legislators in advance of the vote. The Chamber of Commerce argues that two million independent workers in the state seek “flexibility, quality of life, more control over their work, more economic security, extra money on the side, or simply because they enjoy it,” and are lobbying the legislature to “protect [their] freedom to work independently.”

There is some concern that the new labor laws will chill innovation and investment in California, which is home to many of the world’s top tech companies and thousands of start-ups. There is also worry that progressive legislators in other states will soon follow.

Shmulik Fishman, founder and CEO of Argyle – an infrastructure-as-a-service company that makes workforce data (everything from UBER to Fiverr) accessible through a single API, offers another perspective on the impact of the proposed new law. “The real people I worry about are the workers,” says Fishman, “California’s legislature has the right set of goals in mind. Building a framework that increases worker protections, provides minimum payment guarantees, allows workers to organize, creates standards for benefits, health care and time off should be codified. Unfortunately, California’s legislature is pursuing a draconian bill that will: (A) be struck down by a conservative Supreme Court and, (B) lead to less opportunity for contract workers.”

The stakes are high. According to a San Francisco Chronicle article, Uber, Lyft, and DoorDash, are planning to spend $90 million toward a November 2020 ballot initiative to exempt them from AB5.


Equities Contributor: Todd William

Source: Equities News

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