ABC - California Attacks the Gig Economy - September 18, 2019

The so called gig economy, in which many people in our nation work as independent contractors and move around from gig to gig, has been a classic example of free market success - it has improved the lots of workers and companies, and it has improved the overall economy.  Gig workers have vastly increased their autonomy and flexibility; they have a lot of control over the type of work they do, how much of it they do, when they do it, and where they do it.  Companies have been freed, at least to some extent, from the heavy burdens of employment regulations.  Services are being delivered, people are making money, both workers and companies are freely making their own decisions about what's best for them, and the overall economy is benefitting.  Wealth is being created.  The pie is being grown bigger.  As free and fair markets always do, this has produced a win-win-win.  But now, California, in typical heavy-handed fasion, is seeking to kill another goose that has been laying all these golden eggs.


In April 2018, the California Supreme Court, in the Dynamex ruling, undermined its own previous decisions by changing the rules - and vastly broadening its reach - regarding reclassifying designated independent contractors to employee status for certain employee rights under California law.  It implemented the "ABC Rule" to replace the prior framework, which was much more nuanced and much less onerous for companies.  Under the new ABC Rule, California law presumes independent contractors should be reclassified as employees, unless the hiring company, which carries the burden of proof, can prove all three of the following:

  • Autonomy of Worker - the worker is free from the control and direction of the hiring company in the performance of the work;
  • Business of the Company - the work performed by the worker is outside the ordinary business of the hiring company; and
  • Customary Business of the Independent Contractor - the worker is customarily engaged in the type of work or business he or she is performing for the hiring company, and the worker regularly provides similar services to other customers.
Even though the Dynamex ruling was a monumental ruling, in which the Court overturned itself and basically codified new law, not a lot has changed yet on the ground.  Most California companies have not changed their practices with respect to independent contractors, and Uber and Lyft have promised to fight this ruling.
But now the California Legislature and Governor have really thrown down the gauntlet with a brand new legislative act, Assembly Bill 5, which goes much further in granting employee rights to workers designated as independent contractors by hiring companies.  AB5 basically gives full employee status to independent contractors, unless the presumption of guilt can be overcome by companies.  And check this out - consultants who work for a big consulting firm (like Andersen Consulting, for example), but who go to work everyday at a big client (like Symantec, for example) may be classified as employees by both their employer and their client under this new law!  How do you spell, "PAYROLL TAX"!?
While Uber and Lyft have the wherewithal, including deep pockets, to fight this policy, small companies - our clients - are already in the cross hairs of the California Employment Department ("EDD") and are being hit with enforcement actions by them.  We had one such incident just this week.  I guess the bureaucrats at the EDD were anticipating the Governor's signature.  As always, small companies are hurt much worse than large ones by heavy-handed tax policies.  That's the way it goes in aggressive tax regimes, like the current California government.  And, with the usual perverse incentives and unintended consequences that accompany so many government interventions, companies now will have a greater incentive to relocate outside of California, and the very people AB5 was purportedly passed to help, California's gig workers, will be hurt the worst.  This is bad tax policy.
On the other hand, I guess there is one group of people who certainly stand to gain from this new policy initiative by California: employment lawyers.