California Governor Gavin Newsom signed Assembly Bill 5 (AB5), a gig-worker bill that could turn thousands of independent contractors into employees with protections and benefits, into law on Wednesday. The legislation represents a watershed moment in labor law and its effects could be felt for years to come across the entire United States.
“I think it’s the most significant labor employment law development in the country today,” said Michael Lotito, an attorney with Littler Mendelson P.C. in San Francisco. Lotito said he expects New York, Washington and Oregon to follow suit with similar legislation in the coming year.
While much of the focus on the AB5 legislation has been targeted at prominent gig companies like Uber and Lyft, there will be ramifications for a wide range of businesses, including those in the trucking, health care and media industries. However, various occupations have already won exemptions, such as real estate brokers, commercial fishermen and hairstylists, while Uber, Lyft and DoorDash have said they will spend at least $90 million to sponsor a ballot initiative to overturn it. Uber has also said it will go to court to keep its drivers as independent contractors.
As it stands, the legislation is set to go into effect Jan. 1. So, how should California employers — and employers around the country — prepare for a future landscape that might not allow for independent contractors? Lotito said employers’ first steps to prepare for this potential shift should be to arrange an attorney-client privilege analysis of their workforce to determine their independent contractors and non-exempt and exempt employees.
“They need to figure out what the cost is and what the sensible thing is to do,” Lotito explained.
Part of determining the cost, Lotito said, will involve back pay liability considerations for existing contractors, as well as future scheduling conflicts and examining existing policies when it comes to providing benefits.
Lotito noted that California’s various employment laws create further complications with this legislation, including its meal and rest breaks law. The law states that employers must provide a paid rest break for every four hours of work and an unpaid meal break for every five hours. Each rest break must be at least 10 minutes and each meal break must be at least 30 minutes.
This all factors into the flexibility aspect of independent contractors that employers will need to consider in the future if they are required to be employees under the new law.
“Whereas before there was a great deal of flexibility in the scheduling, you may schedule in such a way where the individual is only getting five hours, so you’re trying to avoid the meal break.” Lotito said. “There’s going to be a lot of things like that that are going to happen, because you can’t just say, ‘go do what you want to do,’ because you have the meal breaks, rest breaks and so on, and you can assume all of this increasing liability. These are the practical problems that companies in California have to be in compliance with the law under the best of circumstances — these are the worst of circumstances. So, what we do know for sure, is the law of unintended consequences is going to run amok.”
Beyond the initial impact AB5 and laws like it could have on employers, Lotito offered a couple different big-picture perspectives at play.
Right now, it’s well documented that the U.S. economy is in an extremely healthy state and has been for close to a decade. However, there’s also growing suspicion that a recession is on the horizon. Lotito painted a scenario where California unemployment jumps from its current 4% range to the 10% range it was during the 2007-2008 recession.
“What happens to their unemployment fund? Because the individuals that used to be independent contractors who weren’t paying for unemployment are now are entitled for unemployment,” Lotito said. “Who’s going to pay for all of their unemployment and how quickly is the fund going to go bust? What happened in 07-08 is individuals got laid off from their jobs and they became independent contractors. So, in the next downturn there aren’t going to be any independent contractors, so you’re laid off and you don’t have a job. So, what does that do to the social safety net?”
Lotito said the main thing to keep an eye on with this legislation is how the investment community responds to it. The way that unfolds, he said, could shape the future of employment law in California and result in significant fallout for businesses.
“The question is, is this going to be the tipping point in California?” Lotito said. “Or is this another one of those situations where the California legislature says ‘if you want to do business and you want to reach out to 39 million people and be a part of the fifth largest economy in the world, you’ve got to follow our rules and here it is.’
“If the companies in the investment communities say, ‘OK,’ the sky is the limit. California will be able to do whatever they want — forever. But this may be the tipping point. We’ll see.”
GIG ECONOMY FUTURE ROUNDUP
Carolyn Said sorts through questions about AB5 legislation in this article for the San Francisco Chronicle. While Said’s piece doesn’t delve into the finer points of the nuanced legislation, it provides a good baseline of understanding what it means.
An Employee Win in California
AB5’s passage could easily be seen as just another progressive victory in California, but it’s more than that, writes Alexia Fernandez Campbell of Vox. Campbell proclaims that the bill’s passage is a historic moment for the U.S. labor movement, because it makes it harder for employers to misclassify employees as independent contractors.
Death to the Gig Economy?
Not too long ago, the gig economy looked as if it just might be the future of work in America, but California’s AB5 law could be the beginning of the end to the gig economy, writes Neil Irwin of the New York Times. Irwin surmises that the gig economy is looking less like the future of the labor market and more like a niche arrangement that’s applicable in just a handful of industries and used primarily as a side hustle for people whose main earnings come from full-time employment.
Uber and Lyft Future
Uber and Lyft have experienced significant setbacks since their initial IPOs in the spring, but new local laws could have both companies scrambling to react, writes Tim Ronaldson of The Motley Fool. Ronaldson looks beyond the AB5 legislation to examine how gig-specific companies like Uber and Lyft will operate in the future if more legislation is enacted limiting or eliminating the use of independent contractors.
About the Author
Brett Christie is a staff writer at WorldatWork.