What’s Next For California’s Gig Economy After AB 5

About a year-and-a-half after a state Supreme Court decision that brought the issue to the forefront of legislators’ attention, the California Senate voted to approve Assembly Bill 5 on Tuesday (Sept. 10) — and in so doing has very possibly changed the course of the gig economy forever.

The bill, which passed the state’s General Assembly in early June, codifies a new three-tiered test to determine when a worker is more appropriately categorized as an independent contractor versus when they ought to be classified as an employee with all the standard benefits and protections. The basic structure agreed to by both the California State Senate and GA creates three barriers a worker must clear to be considered a contractor, not an employee.

A worker can be classified as a contractor only when the following three conditions are met:

1. The worker is free from the “control and direction” of the company that hired them while they perform the work for which they were contracted.
2. The worker performs a function that falls outside the client firm’s normal scope or type of business.
3. The worker being hired has a business that is independent of the trade for which they have been hired.

There are some amendments and exemptions to the law that are still being finalized. Most of them center on areas where workers have a history of setting their rates, freelance creative workers, medical and dental professionals, those in the construction industry or those in salon services, for example. However, it is widely expected those details will be ironed out in the next few days and California Governor Gavin Newson has already signaled he will sign it when it hits his desk.

It seems AB 5 is done but for the final counting — and will soon be California’s local law of the land.

However, what will enforcement look like — and will it have the expected devastating effect on ridesharing services like Uber and Lyft — not to mention the host of mobile platform enabled, work-on-demand platforms that borrowed and adapted the ridesharing model?

That part remains unclear — because much of what’s next remains unknown.

That the law has been passed, for example, doesn’t answer how comprehensively the law will be enforced.  Massachusetts, Virginia, and New Jersey all have ABC tests codified into law that are similar to California’s, but Uber and Lyft drivers remain classified as independent contractors in those states. According to Catherine Ruckelshaus, general counsel of the National Employment Law Project drivers in those states should be classified as employees, but via the use of arbitration agreements with workers gig economy firms have made enforcement difficult.

“If there’s no enforcement,” Ruckelshaus told The Verge.  “it’s not going to fundamentally change these business structures.”

Uber agrees that its workers remain contractors under the kinds of ABC tests that offer criteria for distinguishing contractors from employees — but provides a different explanation. Under those tests, Uber’s workers are contractors.

“Under that three-part test, arguably the highest bar is that a company must prove that contractors are doing work ‘outside the usual course’ of its business,” Tony West, Uber’s chief legal officer, said on a call with reporters. “Several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”

West said Uber intends to follow AB 5 should it be put into law next year, but that it will continue to try to prove that it doesn’t fall under its legal framework.

Lyft spokesperson Adrian Durbin had slightly more pointed words about the new law.

“Today, our state’s political leadership missed an opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits,” Durbin said in a statement. “We are fully prepared to take this issue to the voters of California to preserve the freedom, and access drivers want and need.”

Taking the issue to voters, in this case, will entail at ballot initiative to which Uber, Lyft and DoorDash have jointly pledged $90 million. The 2020 ballot question would exempt them, and other gig economy firms, from AB 5.

The bigger question for Uber, Lyft, DoorDash and the rest of the gig economy players is beyond California’s borders and whether state governments nationwide are about to reconsider Uber’s contractor-based business model.

“A domino effect [is] not just possible, it’s all but guaranteed,” said Bradley Tusk, an early Uber investor and adviser, and president of Tusk Ventures, told The Verge “And if the sharing-economy companies can’t radically reframe the narrative from ‘evil Silicon Valley powerhouse versus workers’ to ‘what this actually means for workers and consumers versus groups looking to profit from the changes,’ they’ll keep losing everywhere.”