On November 4, 2020, gig-economy companies operating in California (particularly, ride-share companies such as Uber and Lyft) breathed a deep sigh of relief, as Proposition 22 - which exempts app-based driving services from having to re-classify their drivers from independent contractors to employees under Assembly Bill 5 (“AB 5”) - was overwhelmingly approved by California voters. But this was not without the drivers receiving certain employee-like protections and benefits they otherwise were not receiving.
Specifically, Proposition 22, (which did not do away with AB 5 as some people may think), provides app-based drivers with occupational accident insurance to cover injuries and illnesses incurred on the job. It also requires app-based transportation and delivery companies to provide healthcare subsidies to drivers who work at least 15 hours a week in the form of a stipend towards private health insurance (as opposed to health insurance through an employer healthcare option), and an even greater stipend if the worker drives more than 25 hours a week. Proposition 22 also promises “guaranteed minimum earnings” equal to 120% of California’s minimum wage. However, these minimums only apply to “engaged time” on the app, which covers roughly 30% of workers’ shifts when there is a passenger in the car. Finally, Proposition 22 requires that app-based transportation and delivery companies: (1) develop sexual harassment policies; (2) conduct criminal background checks; and (3) mandate safety training for their drivers.
In addition to Proposition 22, the state legislature recently enacted AB 2257, which was signed into law by Governor Newsom on September 4, 2020. AB 2257 allows district attorneys, in addition to the Attorney General and certain city attorneys, to seek injunctive relief against businesses suspected of misclassifying independent contractors, which could lead to increased enforcement actions. More fundamentally, however, AB 2257 expands certain existing exemptions and categorizes additional professions as exempt under AB 5. In other words, worker classification in these newly exempt industries will be determined under the prior Borello test as opposed to the Dynamex test.
For example, AB 2257 creates exemptions for various professions in the entertainment industry. Specifically, the bill exempts from AB 5 (1) professions related to creating, marketing, promoting, or distributing sound recordings or musical compositions, but not film or television; (2) musicians or musical groups performing single-engagement live events that are not (a) a symphony orchestra, a musical theater production, or occurring at a theme park or amusement park, (b) a headliner in a venue with over 1,500 attendees, or (c) occurring at a festival that sells over 18,000 tickets per day; and (3) individual performance artists (i.e. comedians, magicians, mimes, etc.) who present material that is their original work and creative in character, and who can meet certain other requirements related to the control over their work.
AB 2257 also enlarges AB 5’s “professional services” exemption, which applies to individuals in specified industries.[1] While this exemption previously applied to photographers, photojournalists, freelance writers, editors, and newspaper cartoonists – it has been expanded to include videographers, photo editors, translators, copy editors, and illustrators; however, workers performing these services in the film or television industries were not included. Critically, these workers are no longer limited to 35 content submissions per year to remain eligible for this exemption. In other words, workers in these industries will remain governed by Borello regardless of how often they submit content to an individual hiring entity (so long as they satisfy additional requirements, including that the work is performed under a written contract containing specific terms for payment). Additionally, other workers now included by AB 2257 under this “professional services” exemption are: those who contribute to the content of a journal, book, periodical, or any other educational, academic, or instructional work; specialized short-term instructors; registered professional foresters; and real estate appraisers/home inspectors.
AB 2257 further revises AB 5’s “referral agency” exemption, which applies to the contractual relationship between a business, including individuals operating as a sole proprietor, and a “referral agency” wherein the referral agency provides client connections. Critically, AB 2257 expands the kinds of referral agencies businesses may contract with while availing themselves of this exemption. Specifically, “referral agencies” now include those in consulting, youth sports coaching, caddying, and interpreting services. Further, AB 2257 requires the contracting business to certify to the referral agency that it possesses proper business licenses and tax registration, and must maintain such documentation for at least three years – obligations that had been imposed on the referral agency under AB 5.
Moreover, AB 2257 expands AB 5’s “business-to-business” exemption, which is not limited to specific industries and applies to contractual relationships between businesses when one (the “service provider”) is hired to perform services for the other (the “contracting business”). In particular, public agencies and quasi-public corporations are now included as “contracting businesses”. Further, while AB 5 required that service providers provide services directly to the contracting business, AB 2257 now allows them to provide services directly to the contracting business’s customers - so long as the service provider’s employees perform “under the name” of the service provider. Relatedly, AB 2257 also exempts the relationship between two individuals (acting as sole proprietors or business entities) wherein work is performed under contract at the location of a “single-engagement event.”
Lastly, AB 2257 adds unqualified exemptions from AB 5 to the following occupations: licensed landscape architects; licensed professionals who provide underwriting inspections and other services for the insurance industry; manufactured housing salespersons; people engaged by an international exchange visitor program; and competition judges with specialized skills.
In sum, California’s worker-classification landscape is complex and continues to evolve. While an entirely new framework was imposed in recent years with the enactment of AB 5 and decision in Dynamex, legal challenges, including those in the legislature (i.e. AB 2257) and at the ballot box (i.e. Proposition 22), continue to soften AB 5’s rigid confines. These challenges will have the likely effect of allowing the use of independent contractors in a growing number of industries to remain largely undisturbed. Further, while President-Elect Joe Biden has indicated his support for AB 5 and a desire to adopt and apply a similar framework nationally, only time will tell if such a nation-wide change will occur. Nonetheless, businesses must stay vigilant and remain extremely careful when classifying a given worker, as penalties for misclassification can be severe and, as mentioned above, enforcement actions for misclassification can now be brought by district attorneys.
[1] The “professional services”, “referral agency” and “business-to-business” exemptions discussed herein additionally require the party seeking to validate independent contractor status to demonstrate that the worker in question meets certain requirements related to independence, which must be closely analyzed with the specific facts surrounding a given relationship.
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For more information about our Business Litigation practice and employment law specialty, please contact Jeffrey Gersh at .
About the Authors:
Jeffrey Gersh is a Partner of the Firm in the Business Litigation Practice. Before joining Stubbs Alderton & Markiles, LLP, Jeffrey was Managing Partner of The Gersh Law Firm, Inc. for over 10 years and a partner for 25 years with a prominent litigation law firm. Jeffrey has been named a Thomson Reuters “Super Lawyer” for more than 9 years by his peers; an honor only achieved by less than 2.5% of attorneys in California.
Jeffrey successfully litigates, arbitrates, or mediates for both plaintiffs and defendants complex business and commercial matters, whether for individuals, public or private corporations, partnerships, limited liability companies and/or its members, shareholders and partners. Jeffrey Gersh successfully handles disputes regarding contract matters, trade secrets, intellectual property (trademarks, copyrights and trade dress) negligence and fraud, employment, real estate, license agreements, the apparel and garment industry, and general business matters.
Garett Hill is an associate of the Firm. His practice focuses on all stages of business litigation.
Since joining the Firm, Garett has made significant contributions to a wide variety of litigation matters. Specifically, Garett has assisted in the successful resolutions of complex commercial arbitrations, partnership disputes, judicial dissolution actions, and breach of contract and fiduciary duty claims. Additionally, he has provided invaluable insight and advice to clients in developing areas of law, including proper worker classification and government relief programs made available to businesses during the COVID-19 pandemic.
Stubbs Alderton & Markiles' attorneys were featured this week in Law360 for their article entitled "The Fight For Clarity On Calif. Worker Classification Law". The featured article can be viewed on their website.
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Since taking effect on Jan. 1, A.B. 5 has received its share of criticism and legal challenges. While the law may be well-intentioned, opponents claim it goes too far and restricts workers’ abilities to earn a living.
Steep penalties can result from noncompliance. As a result, many businesses are frustrated by the lack of guidance on how to appropriately conform to A.B. 5, especially considering the high number of exemptions and the potential for more to come.
Even for exempted professions, like freelance writers and photographers and fine artists, certain requirements must be met for said exemptions to apply. Rather than risking penalization for failing to properly conform or increasing their own costs to convert workers to employees, some businesses have opted to outsource work out of state.
These sentiments, among others, have necessitated a growing number of challenges to A.B. 5 in both California state and federal courts and the state’s Legislature. In light of these challenges, discussed in more detail below, California appears to be headed toward a series of much-needed judicial interpretations and legislative wrangling whereby the precise parameters of A.B. 5 will hopefully be clarified.
Generally, these challenges appear to signal a gradual erosion of the text of A.B. 5 as passed (i.e., more exemptions) and clear(er) guidance on how courts will interpret workers’ or public enforcement claims.
Specifically, a few of the currently unanswerable questions that will hopefully become clearer through 2020 include, but are in no way limited to:
• For purposes of qualifying under the professional services exemption, what does it mean to be "customarily engaged in the same type of work … with another hiring entity"?
• Relatedly, what exactly qualifies as a "fine artist" or "graphic design" worker?
• To apply under the business-to-business exemption, how must the hiring business demonstrate that the contracting business is free from its "control and direction"?
• Relatedly, will that phrase be interpreted the same as when applied to the referral agency exemption?
Below are brief summaries of a few of the most significant pending lawsuits challenging A.B. 5 enforcement.
Olson v. California
Two independent workers who used the Postmates and Uber applications to earn a living have filed suit in the U.S. District Court for the Central District of California claiming that A.B. 5 violates the California and U.S. Constitutions.[1] Postmates Inc. and Uber Technologies Inc. joined in the action as well.
They argue that there is no rational basis for determining the numerous professions that the bill exempts from applying the strict ABC test established by the California Supreme Court's 2018 decision in Dynamex Operations West Inc. v. Superior Court of Los Angeles County, thereby violating the equal protection clauses of the California and U.S. Constitutions. On Feb. 10, the court denied the plaintiff s’ request to halt A.B. 5’s enforcement, citing the state’s need to police misclassification as outweighing any harm to the companies and allowing the case to proceed to a determination on the merits.
California Trucking Association v. Becerra
The California Trucking Association has challenged A.B. 5 on preemption grounds in another lawsuit filed in the U.S. District Court for the Southern District of California, asserting it is inconsistent with the Federal Aviation Administration Authorization Act.[2] The suit gained steam on Jan. 16, when the court extended a previously granted temporary injunction that bars enforcement of the law on the trucking industry.
Separately, in an identical case brought by the California Trucking Association in Los Angeles Superior Court, the court there held that A.B. 5 is indeed preempted by the FAAAA on Jan. 8.[3]
American Society of Journalists and Authors Inc. v. Becerra
Freelance journalists have also challenged A.B. 5 in the U.S. District Court the Central District of California, arguing that their exemption, which allows for no more than 35 submissions per year in order to remain governed by the more flexible Borello test, violates the First Amendment.[4] In that case, the court denied injunctive relief in early January.
Proposed Legislation
While these litigation proceedings, and many others, are still working their way through the courts, California legislators have wasted no time introducing bills to upend the effects of A.B. 5. The following proposed bills, if passed, would take effect Jan. 1, 2021:
• S.B. 868 seeks to eliminate the 35-submission cap for freelance journalists and photographers, allowing all in the profession to remain independent contractors pursuant to satisfying the far less stringent Borello test regardless of how many pieces of content a freelance journalist submits to a given employer within a year.
• S.B. 867 seeks to make permanent the temporary exemption that A.B. 5 extends to newspaper distributors and carriers, which currently lasts until Jan. 1, 2021.
• S.B. 875 seeks to exempt interpreters, translators and court reporters, allowing them to remain independent contractors pursuant to passing the Borello test.
• S.B. 881 seeks to exempt persons providing services as a musician and music industry professionals, except where a collective bargaining agreement applies, also allowing them to remain independent contractors pursuant to passing the Borello test.
• A.B. 1925 would exempt small businesses, defined as independently owned and operated businesses with fewer than 100 employees and average gross receipts of $15 million or less over the previous three years, pursuant to their satisfying Borello.
• A.B. 1928 would overturn A.B. 5 in its entirety. Unlike the bills discussed above, A.B. 1928 would take immediate effect upon its passage. Specifically, A.B. 1928 seeks to reinstate Borello as the generally applicable standard for separating employees from independent contractors. However, A.B. 1928 would not nullify the Dynamex decision wherein the California Supreme Court held that the ABC test applies to claims brought under California wage order laws.
Lastly, Uber Technologies, Lyf t Inc. and DoorDash Inc. are the primary funders behind the Protect App-Based Drivers & Services Act, an initiative currently gathering signatures in order to make its way onto the November 2020 California ballot. If successful, this act would classify app-based ride-share and delivery drivers as independent contractors for all purposes, subject to meeting certain flexibility-based requirements, in exchange for minimum wage, health care, anti-discrimination, and insurance-based protections.
For now, companies should consider at least the following to ensure compliance with this new framework:
1. A.B. 5 and the ABC test presume that anyone performing a service is an employee; therefore, it is imperative to evaluate how workers are classified. Misclassification can be costly. Unless there is a recognized exemption, independent contractor status is very difficult.
2. If you are concerned that someone has been misclassified, determine what action needs to be taken to avoid being penalized. This can include reclassifying an independent contractor as an employee and providing, among other things, compensation for missed meal breaks, overtime pay, and any tax obligations or contributions to unemployment insurance.
3. The Dynamex decision could be given retroactive effect by the California Supreme Court this year, which would result in the ABC test’s application to wage order law claims going back four years. Even if Dynamex is not determined to be retroactive, the ABC test would still apply to these claims going back to the date of the Dynamex decision in April 2018. The impact that this retroactivity decision will have on A.B. 5 enforcement, which explicitly states it is not retroactive aside from applying for exemptions, remains unclear. Accordingly, classification practices over the previous four years should be evaluated to determine potential liability.
4. Review your situation if you currently or historically have classified, someone, as an independent contractor and paid them accordingly.[5]
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Jeffrey F. Gersh is a Partner of the firm. Before joining Stubbs Alderton & Markiles, LLP, Jeffrey was Managing Partner of the Gersh Law firm, Inc. for over 10 years and a partner for 25 years with a major national litigation law firm. Jeffrey has been named a Thomson Reuters “Super Lawyer” for more than 7 years by his peers; an honor only achieved by less than 2.5% of attorneys in California.
Jeffrey successfully litigates, arbitrates, or mediates for both plaintiffs and defendants complex business and commercial matters, whether for individuals, public or private corporations, partnerships, limited liability companies and/or its members, shareholders and partners. Jeffrey successfully handles disputes regarding contract matters, trade secrets, intellectual property (trademarks, copyrights and trade dress) negligence and fraud, employment, real estate, license agreements, the apparel and garment industry, and general business matters.
Jeffrey approaches his litigation practice from a business perspective, rather than purely transactional. In addition to representing his clients in litigation and dispute resolution matters, Jeffrey handles many of their various transactional matters relating to general business, trademarks, trade dress, copyrights and other intellectual property matters, trade secret matters, and employment matters to name a few.
Jeffrey has been directly involved in litigation and business matters for clients not only in California, but also in New York, Nevada, Texas, Arizona, London, Australia, and Estonia and other places. He litigates cases from inception through trial and in some cases appeal, directly responsible for all aspects of the prosecution, defense, and resolution of his client’s complicated and sophisticated matters in both state and federal courts. As a result of his commitment to his client’s needs, he has enjoyed long-standing client relationships.
Garett Hill is an Associate of the Firm. His practice focuses on all stages of business litigation.
Prior to joining the firm, Garett was a certified law clerk with the Re-Entry Clinic at Loyola Law School where he successfully represented Los Angeles residents seeking to expunge or seal their prior convictions or trying to obtain or restore a license that had been negatively impacted by prior convictions. Garett completed the Corporate Law Concentration at Loyola Law School where he excelled learning within the various substantive areas of business law. Additionally, Garett worked as a legal intern in-house at AECOM, where he primarily focused on corporate governance and construction law matters. He also worked as a law clerk at Girardi & Keese where he gained invaluable exposure to high-volume litigation.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Olson v. California, 2:19-CV10956 (C.D. Cal., filed December 30, 2019).
[2] California Trucking Association v. Becerra, 3:18-CV02458 (S.D. Cal., filed Oct. 25, 2018).
[3] The People of the State of California v. Cal Cartage Transp. Express, Cal. Super. Ct. No. BC689320, order 1/8/20.
[4] American Society of Journalists and Authors, Inc. v. Becerra, 2:19-CV10645 (C.D. Cal., filed December 17, 2019).
[5] This article is not intended to be a complete recitation of the law regarding the Dynamex decision or the impacts of A.B. 5. Each business has its own unique issues and circumstances that need to be separately evaluated by an attorney