- California Assembly Bill 5 (AB5) extends employee classification status to some gig workers.
- Under AB5, companies must use a three-pronged test to prove workers are independent contractors, not employees.1
- AB5 was designed to regulate companies that hire gig workers in large numbers, such as Uber, Lyft, and DoorDash.
- On Sept. 4, 2020, the California legislature passed Assembly Bill 2257, which exempts a long list of job categories from AB5 strictures.4
- On Nov. 3, 2020, California voters approved Proposition 22, an initiative backed by Uber, Lyft, and DoorDash that legally designates drivers for app-based ride-hailing and delivery services as independent contractors—overriding AB5.
AB5 Impact on Workers
The most immediate implication of AB5 and its one-two-three test is that it turned some independent contractors into employees. “The key factor for gig companies is ‘2,’ which says that anyone performing work for a company that is the same as the business of that company is presumed to be an employee,” says Danielle Lackey, chief legal officer at Motus, which provides reimbursement solutions for businesses with mobile-enabled workforces.
Lackey says that, under the bill, if employers begin classifying gig workers as employees, it means these workers will be entitled to a minimum wage, expense reimbursements, health insurance, rest breaks, and the other benefits afforded to employees under California state law. In that sense, the bill creates a level playing field between those working in the gig economy and those hired as regular employees.
There are potential downsides, however—if gig workers who are treated as employees are, because of this, expected to adhere to a new set of standards regarding how they perform their work. For example, one major appeal of being a gig worker is the ability to choose when and when not to work.Pros
- Creates a level playing field between gig economy workers and those hired as regular employees
- Entitles workers to a minimum wage, employee benefits, and other perks
- Potential loss of flexibility in regard to hours for reclassified workers
- Reclassifying costs could raise prices for consumers
As an employee, a former gig worker may lose that choice. “Certain people are very attracted to this type of work and flexibility and will most likely drop out, as they may not like fixed schedules or other rules and requirements,” says Elliot Dinkin, president and CEO of Cowden Associates, a Pittsburgh-based consulting and actuarial firm.
Lackey says AB5 doesn’t mandate the elimination of flexibility altogether. “But if employers begin incurring the greater cost of paying for employees instead of contractors, they may decide to take advantage of the ability this gives them to exert more control.”
AB5 Impact on Businesses
The signing of California AB5 into law affects many, but not all, businesses that rely on gig workers in California. Examples of the types of professions and businesses that are exempt include insurance agents, attorneys, real estate agents, and certain types of business-to-business contractors and referral agencies.1 Companies that are not exempt will have to take a closer look at how they classify employees and independent contractors to ensure that they’re not violating the terms of the bill.
For companies that do reclassify gig workers as employees, the question of how easy the transition will be centers on cost. If companies now have to pay a minimum wage, offer paid time off and health insurance, and pay unemployment insurance and worker’s compensation benefits for this new crop of employees, that could have a significant impact on the bottom line.
AB5 put ride-sharing and delivery companies, such as Uber, Lyft, and DoorDash, in the spotlight. Some analysts suggested that the cost of reclassifying gig workers as employees would potentially bankrupt both companies, destroying the gig worker business model in the process.7 Dinkin says that if companies want to preserve their profit position, then the additional costs of reclassifying will likely be passed on to the consumers who use their services.