California’s New Gig Worker Law. What is AB-5?

What is AB-5? In short, AB-5 is “Assembly Bill 5” which was passed in the California state senate for the purpose of curbing the use of independent contractors and inducing companies to provide them with the protections and benefits that employees enjoy. The goal of the legislation is to secure labor protections like minimum wage,...

What is AB-5?

In short, AB-5 is “Assembly Bill 5” which was passed in the California state senate for the purpose of curbing the use of independent contractors and inducing companies to provide them with the protections and benefits that employees enjoy.

The goal of the legislation is to secure labor protections like minimum wage, workers compensation, unemployment insurance, and overtime pay for more than a million workers in the state of California, and other independent contractors. It would also bring in more tax revenues from businesses and allow workers in the gig economy to unite through labor unions.

Assemblywoman Lorena Gonzalez tweeted in celebration,

The bill was prompted by many of the labor practices that stem from the business model of companies like Uber, Lyft, Instacart, Postmates and Door Dash. And while the media likes to focus on rideshare and delivery companies, these practices are also widely used by tech companies such as Amazon, Google and Facebook, just to name a few.

Studies and surveys, including our own, have consistently shown that many of the independent contractors who perform the primary work of these companies were earning less than minimum wage. And they benefit from none of the benefits and protections that that all other workers enjoy, such as payroll taxes and health care.

California Governor Gavin Newsom signed AB-5 into law in September 2019. But the law still has a long ways to go before it will make a difference and experts are speculating that may never take effect as originally intended.

Why AB-5 May Never Go into Effect

With all the effort that has been put into it, there is a chance that AB-5 may never actually go into effect. Not only are the big gig companies going to try to overturn it at the ballot box, plenty of other companies are already planning to sue the state over it. Those lawsuits may eventually work their way to the Supreme Court which could overturn it altogether.

It must be remembered that it does not only effect Uber and Lyft drivers, but all affiliated parties that are granted a contractor status, under the current employment law, from a hiring entity in California.

However, it was the rise of Uber, Lyft, DoorDash, Postmates, Instacart, and the many others based in San Francisco, Los Angeles, and elsewhere in the United States, that set in motion the high-profile way they were perceived to have abused their workers that led to this issue being put on the table.

So we’ll look at it mostly in terms of how it effects Uber and Lyft drivers, as they are pretty representative of the group of people the bill was primarily intended to cover. However, it is because it does effect all companies that use independent contractors that it may never go into effect.

At least one legal precedent has already been set, though, for the law by the California Supreme Court. And it was that precedent that the law was largely based on.

In April 2018, the California Supreme Court issued a game-changing decision in the case of Dynamex Operations West, Inc. V. Superior Court of Los Angeles.

The decision would make it nearly impossible for gig companies like Uber and DoorDash to classify their workers as independent contractors. In the ruling, the justices wrote an opinion that laid out several principles in law that ended up forming the legal rationale behind AB-5. The Borello test, oftentimes referred to as the law’s “ABC test”, is used to determine employment status.

The principles the court laid out in order for a company to classify a worker as an independent contractor included:

  • Businesses must show that the worker is free from the control and direction of the employer
  • Workers must perform work that is outside the hiring company’s core business
  • Workers must “customarily engage” in an independently established trade, occupation or business (this was also novel and strikes at the heart of companies like Uber).

The first principle, above, was not new or novel. The degree to which companies exercise control and direction over their workers was one of the traditional standard measures of whether or not a worker was an independent contractor or an employee. So, this was not a new or novel idea.

The last two principles, however, were novel and seemed squarely aimed at the rise of the giant gig companies that were utilizing tens of thousands of workers to perform the primary work of the companies as independent contractors rather than employees.

What are the Next Steps for AB-5?

The businesses AB-5 was passed to regulate are not going to voluntarily comply with the law. In fact, Uber, Lyft and DoorDash and possibly several other gig companies have already formed a coalition to fight actual implementation of the law.

The companies have no reason to rush out and reclassify hundreds of thousands of contractors as employees – unless or until they are forced to do so. Many California businesses that are hoping a carve-out – or exception – will be made for them and what they consider their “unique” situation.

Even though this misclassification of workers costs the state an estimated $7 billion in lost payroll tax revenue, a handful of professions that rely on contract workers are left out of AB-5.

According to CNN, “Licensed real estate agents were given a carve-out in the California bill, along with insurance agents, doctors, securities brokers, and more than half a dozen other professions. Real estate agents needed the exemption because they didn’t meet the law’s “ABC test” for determining status.”

The big guns like Uber, Lyft and DoorDash are putting in at least $10 million each for a ballot initiative that would get them exempted from the law. But there are businesses in many other sectors around the United States, including entertainment, law firms, translating, trucking, construction, and even manicurists and commercial fishermen, that are racing to figure out how they will have to adapt to the law.

The primary intent behind the law wasn’t to affect traditional companies that have a long-standing tradition of using independent contractors. Those companies will also be looking to persuade lawmakers to make some sort of exception for them.

There are scores of highly-professionalized sectors that use independent contractors, including ones that hire doctors, architects, artists, financial advisors and other highly-paid professionals, who for the most part had no complaint with things the way they were.

But for the new gig companies, the law has the potential to usher in revolutionary changes. Converting independent contractors to employees could add 20% to 30% to these companies’ labor costs. They would have to begin paying Social Security and Medicare taxes, which under the current system, independent contractors have to pay completely on their own. Companies would also incur costs for unemployment and disability insurance, workers’ compensation, sick leave, minimum wage, rest breaks, overtime and protections against discrimination and sexual harassment.

Also, under Federal law, independent contractors are not allowed to join unions. But if they are reclassified as employees, they would be able to and this could increase costs to businesses even further.

Art Pulaski, executive secretary-treasurer of the California Labor Federation says, “For far too long, big corporations skirted their responsibility to provide basic protections to workers. The California labor movement will be laser-focused on implementing and enforcing AB 5.”

Are Uber and Lyft’s Threats Credible?

Some of the main arguments Uber, Lyft and the other gig economy companies are making against AB-5 have scared more than a few workers into not supporting the new law.

The top argument the companies make is that if drivers/workers become employees they’ll lose the flexibility they currently enjoy to work whenever they want. But is that argument really a strong one?

We don’t think so. Because it is entirely up to the companies as to how much flexibility they will choose to continue giving to their workers.

Currently freelancers log onto the app whenever they want to work and when they’re ready to quit they simply sign out. There is nothing in the law that will force companies to discontinue allowing this type of arrangement. There is nothing in the law that mandates when workers have to perform their work. However, the companies would have you thinking otherwise if you’re not paying careful attention.

The companies could very easily allow workers to continue working pretty much as they have. There is no reason they couldn’t simply tell workers they have to work a certain number of hours per week to qualify as an employee and allow them to work those hours whenever they please.

What Has Happened in New York

However, New York City has recently passed regulations that are in some ways very similar to AB-5.

The way it has played out is that Uber and Lyft have become more, discriminating, you might say, about when and where drivers can work. Lyft implemented a “go-zone” feature where the app would show drivers where they needed drivers at any given time. So, drivers could still sign on and work whenever they wanted, but they would be locked out of any areas that already had enough drivers to cover the demand. This means they might have to drive to another area to begin their shift.

This is indeed a new restriction because it limits the number of areas where drivers can work at any given time. However, it also means that those who are already working in those areas will be kept very busy. And that is kind of the point, isn’t it?

New York wanted to reduce the number of idle drivers. Since it cost Uber and Lyft nothing to have more drivers on the road than they needed, New York structured its new regulations in such a way that it would cost the companies money if they put more drivers on the road than the demand could support.

While this does limit opportunities for drivers, it also means that those who are driving will earn more per hour, which was the goal of the legislation.

Before these new regulations passed, Uber and Lyft were quite content to allow as many drivers on the roads as wanted to come out. They didn’t care at all whether each driver was actually making a decent hourly wage. They were more than happy to have more drivers than they needed because it meant slightly faster pickup times for passengers.

However, now that it’s costing the companies something, they are starting to restrict drivers so they only have the number on the road that they actually need.

New York’s regulations did two things.

First, they put a driver freeze into effect. All New York City Uber and Lyft drivers have to be licensed by the city’s Taxi & Limousine Commission (TLC). The regulations put a two-year halt on the TLC from signing up new drivers.

Prior to this, the TLC was adding thousands of drivers every month. So many that the city had ten times more Uber and Lyft drivers than it had taxi drivers. The moratorium on adding new drivers was the first step in cutting back on idle drivers who sat around for the majority of each hour waiting for their next trip.

The city felt the cars that were on the road should be utilized with a passenger on board for as much of each hour as possible. They saw that the system Uber and Lyft had created was hugely inefficient when it came to vehicle utilization. This meant not only wasted resources such as unnecessary use of gasoline to more traffic than the city had ever seen before but it also meant that each individual driver was in many cases earning less than minimum wage after all car expenses were taken into account.

The next thing the city did was pass a wage floor. They said each driver must earn each driver must earn $17.22 (net) per hour. They could earn more if they got enough business to. But if they earned less than that in actual fare, Uber and Lyft would have to chip in the difference.

You can see why Uber and Lyft suddenly decided it would was no longer a good idea to have more cars on the road than they needed. Because for each unused car, they would have to pay each driver out of their own money-losing pockets the difference between whatever they actually made and $17.22 an hour. If a driver earned just $12 in actual fare income for an hour, Uber or Lyft would have to chip in the additional $5.22.

Obviously that was a no-go. So, the companies now direct drivers to areas that are busy enough to need them. And if no area is busy enough they will not let them login to the app until the supply-demand ratio changes.

If AB-5 has a similar effect, it will mean that whoever is driving will earn more on average than they did before. It will also mean that there will be fewer drivers at any given time. But that’s something that needed to be done all along because Uber and Lyft had always had far more drivers on the road than they actually needed.

What Do Drivers and Other Gig Workers Think About AB-5?

The vast majority of gig workers do enjoy working as independent contractors. They don’t necessarily want to be employees because they value the freedom to work when they want that they have now as independent contractors. However, the gig companies could very easily structure their new system in a way that would give them a similar amount of freedom and independence.

The fact is, the companies have already taken a great deal of flexibility out of the work. If the workers became employees it would just mean they could admit to it and do it in a more open and formal way.

Anecdotal evidence suggests that there is a divide in opinion on AB-5 between full-time and part-time gig workers. Most full-time workers are more in favor of it. That’s because they are the ones who really rely on the work as their full-time and most times only job. They are the ones who are most hurt by the current conditions of low pay and no benefits.

Part-time workers however, have a bit of a different opinion. They do not rely solely on gig work for their living because they do have other work. And it’s because they have other work that they really need and appreciate the flexibility that gig work currently offers. They couldn’t do it if they had to be tied down to a strict schedule because they have other things going on in their lives that make a rigid schedule for a second job impossible to adhere to.

They are the ones who would most like to see things stay the way they are. They’re not so much bothered by the fact that they make around minimum wage because for them, whatever they make is just icing on the cake, on top of what they make at their main job.

Some may do it for vacation money or other leisure activities. So they don’t really care if they are earning much more than minimum wage. Their bills are already paid from the income they have from their “real” job.

We would argue, however, that it is the full-time workers who rely on gig work exclusively who need the most help and who are deserving of the most help because they are the most committed to the work.

Will Gig Workers Really Lose the Flexibility to Work When They Want?

As we have already stated, there’s nothing in the law that would necessitate the companies taking flexibility away from their workers – even if they are converted over to employees.

The fact is, however, much of that flexibility has already been removed. As especially Uber and Lyft have struggled to become profitable, they have realized they need to exercise a great deal of control over when and where drivers work. Over the last couple of years they have built many incentives into their apps that have the net effect of controlling where and when drivers work.

They offer boosts and bonuses that require drivers to spend a certain amount of time in certain areas to qualify for. They may offer to pay drivers a $15 bonus if they do 20 trips. That’s only $0.75 extra per trip, but when you multiply it across 20 trips it does add up to $15. And when you’re barely making $12 an hour – an extra $15 at the end of the day doesn’t sound bad! In fact, it could pay for the majority of a full tank of gas.

But the way the companies structure the bonus is they’ll say, you have to complete 20 trips between 7:00 a.m. and 9:00 a.m. and 4:00 p.m. – midnight on the specified day. And they’ll add a requirement that the trips must originate only from certain areas. Low-paid drivers will break their back to be in those areas at those times to get their desperately-needed $15 bonus.

By employing these kinds of methods the companies are already effectively controlling when and where drivers drive. And they effectively remove much of the flexibility drivers thought they had.

The companies have worked tirelessly to take more control over how drivers drive. So much so, that it makes us think they may in fact be the biggest beneficiaries of AB-5.

It’s almost a mystery as to why they’re fighting it so. Because if drivers do indeed become employees, then the companies can simply tell them, ‘you have to work in these areas between these hours.’ And they won’t have to pay any bonus. They can then exercise full control over how, when and where workers perform their work. And they won’t have to pay them incentives to get them to do it. Seems like a win-win.


What are your thoughts on the new AB-5 legislation? Let us know by dropping a comment below!


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3 Comments

In all of these efforts I do not see any mention of z tax implications. Employees are no longer allowed to deduct expenses. That would be a huge loss to Uber drivers. Currently if you are a crafty tax person your tax liabilities can be lowered buy many deductions. What to ductions would be lost if you became an employee?

In all of these efforts I do not see any mention of tax implications. Employees are no longer allowed to deduct expenses. That would be a huge loss to Uber drivers. Currently if you are a crafty tax person your tax liabilities can be lowered by many deductions. What ductions would be lost if you became an employee?

If AB-5 is upheld, Uber will have to:
1) pay $13 to $15 per hour for all on app hours plus
2) 58 per mile for all on app hours plus
3) 3 sick days plus
4) withholding taxes plus
5) disability insurance (bad backs, repetitive movement injuries) plus
6) Insure drivers for all on app hours
Uber is losing $10 Million per day, if they do not cut expenses, like driver pay, and/or increase revenue, they will be broke in 3.2 years. Adding $500 million in expenses in CA alone will cut Ubers lifetime down to 2.9 years. If the rest of the USA passes AB5-like bills, Uber may not last 1.6 years. Ouch!

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