Update: Governor Newsom signed AB 2257 on September 4, 2020. The law is now in effect. 

As the world focused its attention on the COVID-19 pandemic, other legal issues took a back seat.  In California in the summer of 2020, however, the topic of whether a worker should be classified as an independent contractor or an employee has come to the fore.  Several notable developments show that the important legal, political and social issues wrapped up in the independent contractor debate will be with us for quite some time. 

It has been about a year since Littler’s Workplace Policy Institute published its Task Force Report on AB 5, California’s landmark independent contractor law.  Now is a good time to reflect on what has happened in the last 12 months, and to take a look ahead.

AB 5 – One Year Ago

Last year at this time, the California legislature was debating AB 5.  The law was based on an earlier ruling by the California Supreme Court in Dynamex Operations West v. Superior Court.¹  In Dynamex, the court abandoned the previous test, known as the “Borello” test, which had focused on the right of the putative employer to control the activities of the worker.²  Instead, the court borrowed from the law of the state of Massachusetts and imposed the ABC test on California businesses.  The court’s decision was limited to the state’s wage orders.  Accordingly, it would have been possible for the same worker to be an employee for purposes of the wage orders, but a contractor for purposes of unemployment insurance, workers’ compensation, and other provisions of the Labor Code.  The decision also was potentially retroactive, a question that is being litigated to this day.  Accordingly, Dynamex left many questions unanswered and many in the California business community deeply concerned about the impact of the decision on their operations.

AB 5 was touted as a legislative “fix” to Dynamex.  The law adopts the ABC test for determining whether a worker was a contractor or an employee for purposes not only of the wage orders, but also for unemployment insurance, workers’ compensation, and other provisions of the California Labor Code. 

Under this ABC test, workers are presumed to be employees unless all three of the following conditions are met:

1. The individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact; and

2. The service is performed outside the usual course of the business of the employer; and

3. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.³

AB 5 then went on to list a number of “exceptions” where the former test, known as the Borello test, would be used to determine employee/contractor status. Borello focuses largely on the “A” prong – the right to control, but then also includes an evaluation of secondary factors, including whether the worker was engaged in a distinct occupation or business, or is integral to the business, the level of economic dependence the worker has upon the principal, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed.

It is worth noting that AB 5 uses approximately 130 words to describe the ABC test, and approximately 3,478 words to describe the exceptions.  Not surprisingly, much of the debate around AB 5 centered on whether or not a particular business or occupation qualified for an exception. 

As a state senator noted in a Committee hearing where the bill was considered: 

In all of these carve-outs you are picking winners and losers, so, can you walk me through the process of why you are doing it that way and how you process, who wins, and who loses.  Who gets favoritism and who loses out?⁴ 

Of course, that bill became a law, but as it was working its way out of the legislature, its sponsor noted: 

We probably won’t fix it for everybody this time.  … we will run out of time …  we are not going to get to every situation we dreamed of.  And, I anticipate we’ll be working on this for a few years to get to those situations.⁵

This prophecy has come true.  We are all still, collectively, working on AB 5.

Responses to AB 5

AB 5 is sweeping in its scope and its coverage. Although touted as having primary application to the so-called “gig” economy, the law in fact applies to virtually every business in the state.  Many businesses saw that their particular model of operation was particularly hard hit by this dramatic change in the law, and responded in a variety of ways:

• By reclassifying contractors to employees, though this process could be cumbersome and could lead to unintended consequences;
• By initiating lawsuits challenging the constitutionality of the law;
• By engaging in further lobbying to seek their own exception to the ABC test;
• By filing a ballot initiative to overturn parts of the law;
• By moving business out of California.

In turn, various law enforcement officials in California initiated litigation seeking injunctive relief to force businesses to reclassify workers.  The plaintiffs’ bar also has not been silent, bringing new civil actions alleging misclassification and seeking damages, penalties and attorneys’ fees.

AB 5 has had a dramatic impact on the state, but was temporarily masked as we all turned our attention to responding to the pandemic.  But AB 5 is here to stay, and businesses must continue to evaluate their options and develop strategies for responding. 

In the sections that follow, we discuss and evaluate the current attempts to modify AB 5 in the legislature, the pending legal challenges, the enforcement actions, and the ballot initiative. 

Pending Legislation – AB 2257

Very early in the 2020 legislative session, just a few days after AB 5 became effective, legislators began introducing bills seeking to amend key provisions of the new law.  At one point early in 2020, there were at least 31 different bills seeking to modify, or repeal, AB 5.⁶  Over time, those bills have been distilled into a single vehicle:  AB 2257.  That bill has now been adopted by the California legislature and is on its way to the governor.

If signed into law, AB 2257 would make a number of significant changes to AB 5.  A summary of the bill is provided below.⁷ 

Primarily, AB 2257 modifies some of the current exceptions to AB 5, and introduces a number of new exceptions.  The bill does not upset the existing framework of AB 5 – the ABC test remains in place, with exceptions for particular types of work, for which the prior test, Borello, is applied.  While AB 2257, as it is currently drafted, provides some clarification on some issues relating to AB 5 and creates some flexibility with respect to referral agencies, it also creates some new questions and still leaves unresolved several critical challenges emanating from AB 5.

Modified Exceptions to AB 5

Business-to-Business Exception

AB 5’s so-called “business-to-business” exception has been widely criticized by employment attorneys and business owners as unworkable. The test contains so many intertwined and overlapping requirements, that essentially many businesses in the Golden State simply gave up and did not try to shoehorn themselves into this exception.  AB 2257 does attempt to clean up this exception, to a certain extent.  The bill makes approximately nine different changes in the test, a few of which are highlighted below.

AB 5 includes the following requirement to qualify for the business-to-business exception:

The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.⁸

AB 2257 amends this as follows:

The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.

This change will allow for more flexibility in the application of the exception – a contractor need not actually have a contract with other businesses, it need only have the opportunity for such contracts.

One of the most problematic sentences in AB 5’s business-to-business exception was the requirement that, in order to qualify for the exception and be able to use the Borello test, a business needed to show:

The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.⁹

This sentence left many questions unanswered and caused many to conclude that they did not qualify for the exception.  For example, last-mile delivery services, which deliver goods to our homes:  Are they the “customers” of the original business?  It would seem so.  This would mean that a furniture manufacturer, for example, couldn’t use contractors to delivery furniture to consumers’ homes without rendering them employees under AB 5. 

AB 2257 attempts to clarify this provision as follows:

The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.

This could help in some business arrangements, but in the cases identified by the exception in the second sentence, workers will presumably be receiving W-2s, as they are “employees.”  So the possibility of using this carve out as a vehicle to upholding independent contractor status seems challenging.  And, as with many provisions of the law, this is brand new language, completely untested and with no foundation in other parts of the California code.  It is extremely challenging to predict how courts might interpret such new language.

AB 2257 also addresses another potentially troubling sentence from AB 5:

This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.¹⁰

Practitioners were, to put it mildly, confused by this sentence.  It leaves many questions unanswered – for example, is a sole proprietorship an individual, or a business entity?  The good news is that this sentence has been deleted.

The business-to-business exception in AB 5 also included the following language:

The determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by [the ABC test].

This sentence seems to show the intent of AB 5 to ensure that, at the end of the line, the ABC test is applied.  But the sentence was criticized by employment and labor law practitioners as not being a model of clarity. 

AB 2257 revises this to read:

When two bona fide businesses are contracting with one another under the conditions set forth in paragraph (1), the determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by [the ABC test].

This clarification appears to strengthen the argument that a business service provider itself may be a contractor, but that the persons working for that business service provider would be subject to the ABC test to determine their status. 

Referral Agencies

AB 5 created an exception for “referral agencies.”  A lengthy and complex, multi-factor test must be met in order to qualify.  For example, an internet web site might refer dog owners to dog sitters in the neighborhood.  AB 5 addresses the question of whether those dog sitters are employees of the referral agency, or contractors.  If the exception is not met, the ABC test is used to determine contractor status.  If the exception is met, the Borello test is used to determine status.¹¹ 

AB 2257 makes approximately twenty distinct amendments to this complicated test.  A few of the more significant changes are discussed below.

Under AB 5, the only types of services that could utilize the referral agency exception were service providers that provided graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup.  AB 2257 now adds to this list consulting, youth sports coaching, caddying, wedding planning, services provided by wedding and event vendors and interpreting and interpreting services by a service provider certified by one of several specified agencies.  Further clarifying details are provided to define a “tutor” and a “youth sports coach.”  Importantly, AB 2257 uses the phrase “including but not limited to” to determine coverage, potentially significantly broadening the scope of this exception to also include services not specifically listed.  For example, under AB 5 a service that linked up car washers with customers would not be eligible for the referral agency exception.  Under AB 2257, such a service might be included, due to the “including but not limited to” provision.

But with this potentially new expansive definition of the types of services that can qualify for the referral agency exception, AB 2257 also lists a number of services that absolutely do not qualify.  Those services are:  high-hazard industry services, janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.  One might ask why these occupations and industries were specifically targeted in AB 2257 for exclusion as a referral agency.  It seems likely the courts will need to intervene to answer this question.

AB 5 included this requirement in order for a service provider to be classified as a contractor:

The service provider maintains a clientele without any restrictions from the referral agency and the service provider is free to seek work elsewhere, including through a competing agency.¹²

AB 2257 modifies this to read:

The referral agency does not restrict the service provider from maintaining a clientele and the service provider is free to seek work elsewhere, including through a competing referral agency.

Under this clarification, the service provider need not actually maintain a separate clientele, but only needs to be free to do so.

AB 2257 contains language indicating that that service providers should not displace regular employees:  “‘Client’ means a person or business that utilizes a referral agency to contract for services that are not otherwise provided on a regular basis by employees at their business location.”

AB 2257 also clarifies the following somewhat confusing sentence from AB 5: 

This subdivision does not apply to an individual worker, as opposed to a business entity, who performs services for a client through a referral agency.¹³ 

Employment law practitioners were not entirely sure how this sentence could be reconciled with other parts of AB 5.  But AB 2257 replaces this language with the following:

The determination whether an individual worker is an employee of a service provider or whether an individual worker is an employee of a client is governed by subdivision (a).

This clarification is similar to the clarification in the business-to-business exception, discussed above, and indicates that a service provider itself may be a contractor, but that the persons working for that service provider would be subject to the ABC test to determine their status. 

AB 5’s referral agency exception included these requirements:

The service provider sets its own hours and terms of work and is free to accept or reject clients and contracts.¹⁴

The service provider sets its own rates for services performed, without deduction by the referral agency.¹⁵

AB 2257 addresses these concepts as follows:

The service provider sets their own hours and terms of work or negotiates their hours and terms of work directly with the client.

Without deduction by the referral agency, the service provider sets their own rates, or negotiates their rates directly with the client through the referral agency, negotiates directly with the client, or is free to accept or reject rates set by the client.

A referral agency’s contract may include a fee or fees to be paid by the client for utilizing the referral agency. This fee shall not be deducted from the rate set or negotiated by the service provider …

These changes should help to open the referral agency exception to more business platforms, as there are a multitude of ways that businesses interact with each other and with customers.  These changes will provide needed flexibility to allow for more businesses to take advantage of the referral agency exception.

Finally, AB 5 defines the “client” of a referral agency as follows:

“Client” means a person or business that engages a service contractor through a referral agency. 

AB 2257 expands this definition, as follows:

“Client” means: (A) A person who utilizes a referral agency to contract for services from a service provider, or (B) A business that utilizes a referral agency to contract for services from a service provider that are otherwise not provided on a regular basis by employees at the client’s business location, or to contract for services that are outside of the client’s usual course of business. Notwithstanding subdivision (a), it is the responsibility of a business that utilizes a referral agency to contract for services, to meet the conditions outlined in this subparagraph.

The introduction of the phrase “not provided on a regular basis by employees at the client’s business location” and “outside the usual course of business” of the business could be challenging to interpret and implement.  For the same reasons that the “B” prong of the ABC test is ambiguous (defining what is and what is not the usual course of business of any entity can be challenging), these tests too likely will lead to debates about their exact meaning and application.

Freelance Writers

One of the more controversial provisions of AB 5 was the requirement that, after 35 submissions in a year to a single publisher, a freelance writer or photographer then needed to become an employee of the publisher.  The standard was widely criticized as arbitrary and unworkable.  Indeed, the author of AB 5 was quoted as saying:

Was it a little arbitrary? Yeah. Writing bills with numbers like that are a little bit arbitrary.¹⁶

AB 2257 completely eliminates the 35-per-year submission limit, and replaces it with a standard that requires a contract that, in turn, specifies in advance the rate of pay and intellectual property rights, and requires that the contractor not replace an employee performing the same work at the same volume.  In addition, the writer or photographer must not perform the work primarily at the hiring entity’s business location, and may not be restricted from working for more than one hiring entity.

New Exceptions to AB 5

AB 2257 adds a number of new exceptions to AB 5, generally allowing the Borello test to be used to determine worker status for:¹⁷

• Recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians engaged in creating sound recordings, vocalists, photographers working on album covers, and other press and publicity photos relating to recordings, and independent radio promoters;
• Musicians or musical groups for the purpose of a single-engagement live performance event;
• An individual performance artist;
• Licensed landscape architects;
• Freelance translators;
• Registered professional foresters;
• Home inspectors;
• Persons who provide underwriting inspections, premium audits, risk management or loss-control work for the insurance industry;
• Manufactured housing salespersons;
• Persons engaged in conducting international and cultural exchange visitor programs;
• Competition judges with specialized skill sets;
• Digital content aggregators who serve as licensing intermediaries for digital content;
• Specialized performer hired to teach a master class for no more than one week; and
• Feedback aggregators.

Please note that, as with current exceptions in AB 5, many of these new exceptions require that the “putative employer” establish the existence of several complicated and untested factors in order to qualify for the exception, and even then, contractor status is not established until the Borello test is met.

Public Enforcement

One of the notable provisions of AB 5 allowed for public enforcement – the state attorney general or a city attorney in a city with a population in excess of 750,000 persons was empowered to bring an action for injunctive relief to prevent continued misclassification of workers.The actual application of this provision is discussed in detail, below.

AB 2257 expands this provision further, by allowing any district attorney in the state to bring such an action.This will allow involvement in the issue of independent contractor status by many more cities and elected officials.

Not Addressed by AB 2257

AB 2257 leaves unaddressed many important legal issues relating to AB 5. The bill does not address the issues surrounding those who deliver printed newspapers.AB 323, a separate bill, does this, but only extends the “exception” period for one year.

AB 2257 also fails to mention whether the ABC test applies, or does not apply, to the relationship between a franchisor and its franchisees.This question has been the subject of much debate and litigation.

AB 2257 also does not address the serious concerns raised by the trucking industry with regard to the independent owner-operator model.Indeed, the referral agency-service provider exception expressly states that it does not apply to the transportation industry.

And of course, the bill fails to mention the gig economy at all.It has been noted that independent contractor work helped lift the U.S. economy out of the Great Recession of 2008.With U.S. unemployment hovering at 10%, and a prolonged recession likely in our future, contractor work again could help re-grow our economy, if given a chance.¹⁸

Urgency Statute

AB 2257 is couched as an urgency statute – if signed by the governor, the law will become effective immediately.

Lawsuits Challenging AB 5

As mentioned previously, several groups have attacked AB 5 in court.  To date, six lawsuits have been filed in California directly challenging AB 5:

• Williams Weisberg & Weisberg dba Diamond Court Reporters v. Becerra, 273530 (Sacramento County Sup. Ct.) (Filed Jan. 16, 2020).  In this lawsuit, a California court-reporting company alleges that it is impossible for it to comply with AB 5, as there is no express exception for court reporters.  The company has multiple contracts with various state and federal agencies, requiring statewide coverage.  The company claims that AB 5 forces them to either violate these contracts, or to be sued for misclassification.  A First Amended Complaint was filed on July 14.

• Olson v. Becerra, 2:19-cv-10956 (C.D. Cal.) (Filed Dec. 30, 2019).  In this matter, independent contractors – drivers and deliverers – and the platforms that they use allege that AB 5 violates the equal protection and due process clauses by specifically targeting the gig economy.  Plaintiff’s request for an injunction halting enforcement of AB 5 was denied by a federal court; the matter is on appeal to the Ninth Circuit. 

• American Society of Journalists and Authors, Inc. v. Becerra, 2:19-cv-10645 (C.D. Cal.) (Filed Dec. 17, 2019).  Two trade associations representing freelance journalists and photographers challenged AB 5’s requirement that after 35 submissions in a year, to a single publisher, a freelancer must be classified as an employee.  The lawsuit alleges that the arbitrary limit infringes on their First Amendment rights of free speech.  A district court judge denied a request for an injunction; the matter is on appeal to the Ninth Circuit. 

• California Trucking Association v. Becerra, 3:18-cv-02458 (S.D. Cal.) [Note: Original complaint predates AB 5; filed Oct. 25, 2018].  The California Trucking Association successfully sued California to block enforcement of AB 5 with respect to motor carriers in California that are subject to regulation by the federal Department of Transportation.  In its decision, the court explained that it was likely that the CTA would prevail on the merits of its argument that AB 5 is preempted by federal law regulating the trucking industry.  The injunction remains in place as the case is on appeal to the Ninth Circuit.

• Western States Trucking Association v. Becerra, 5:19-CV-02447-CAS (C.D. Cal.) (Filed Dec. 19, 2019).  In this action, the trade association alleges that the construction trucking industry exceptions in AB 5 also are subject to regulation by the federal Department of Transportation.  The federal district court found that the case was not ripe, as the state has disavowed any intent to bring enforcement actions against members of the association, as the exception applies only to licensed contractors.  The court dismissed the complaint on May 18, 2020.   

• Crossley v. Becerra, 20-cv-0284-GPC-JLB (S.D. Cal).  In this action, individuals and businesses that collect signatures to qualify popular-initiated referendums on the ballot for public vote allege that AB 5 violates the law on numerous constitutional grounds, including the Equal Protection Clause, Contract Clause and First Amendment of the U.S. Constitution, and provisions of the California Constitution.  The court dismissed the plaintiffs’ complaint on August 17, 2020, but provided them 20 days in which to amend their complaint and refile.

Enforcement Actions

As explained above, state and local governments have initiated several lawsuits regarding alleged independent contractor misclassification.  The state of California has begun to aggressively enforce AB 5, and Governor Newsom’s 2020 budget expressly included more than $20 million for enforcement of the new law. 

Even prior to the law’s effective date, San Diego County sued one platform-based grocery delivery company, alleging that it misclassified its in-store shoppers as independent contractors rather than employees.  In February, the trial court concluded that the state was likely to prevail on its argument that these workers are classified as employees under Dynamex, while recognizing that “there is room to debate the wisdom” of California’s “unapologetically pro-employee” labor policies.  The court stayed enforcement of its injunction against the company pending appellate court review.

More recently, in May 2020, California’s attorney general sued Uber and Lyft, alleging that the companies misclassified their drivers as independent contractors.  On August 10, 2020, the superior court granted the state’s motion for a preliminary injunction.  On August 20, the California First District Court of Appeal stayed enforcement of the injunction pending the resolution of the appeal.  However, the court imposed a novel requirement – the stay is subject to the condition that, by 5:00 p.m. on September 4, 2020, the Defendants both submit a sworn statement from their chief executive officers confirming that they have developed implementation plans under which, if the court affirms the preliminary injunction and Proposition 22 (discussed further below) on the November 2020 ballot fails to pass, the company will be prepared to comply with the preliminary injunction within no more than 30 days after issuance of the decision of the court of appeal.  Oral argument is scheduled for October 13, 2020.

While it is possible that the court of appeal could rule before the election on November 3, given the reference in the court’s order to events taking place thereafter, many have opined that this seems unlikely. 

In June of this year, San Francisco’s district attorney sued food delivery platform DoorDash alleging that it was misclassifying its workers as independent contractors.  In July, the California Labor Commissioner’s Office filed suit under AB 5 alleging that an app-based car wash company in Southern California likewise misclassified some of its workers.  And in August 2020, the California Labor Commissioner filed lawsuits against Uber and Lyft, alleging that the transportation network companies misclassify their drivers.  These new suits are separate from the ones pursued by the state’s attorney general.  We fully expect these lawsuits to proliferate as California continues its aggressive enforcement regime.

Proposition 22

The fate of AB 5, at least with respect to transportation and delivery network companies, is ultimately in the hands of California voters this fall.  On the ballot in November’s election is Proposition 22—a ballot initiative that would exempt app-based rideshare and delivery drivers from the AB 5 test, and deem them independent contractors, subject to certain conditions.

If adopted by the voters, Proposition 22 would declare that app-based drivers are independent contractors and not employees of their network company if the network company does not unilaterally prescribe their schedule or a minimum number of hours; does not require drivers to accept any specific ride or delivery request to maintain access to the network; and allows drivers to work for other network-based companies or hold other jobs.  In addition, Proposition 22 would guarantee that drivers be paid no less than 120% of minimum wage for the time that they are engaged, as well as payment per mile.  Network companies would also be required to provide health care subsidies and insurance coverage to drivers, develop anti-harassment policies, provide drivers with mandatory safety training, and conduct criminal background checks on network drivers. 

If approved by the voters, Proposition 22 will become effective on the fifth day after the secretary of state certifies the election results.  Given the ongoing tumult surrounding the upcoming election in general, it is possible that the results may not be certified for several days. 

Perhaps unsurprisingly, the path to Proposition 22 has been a litigious one.  Most recently, ballot supporters sued the California secretary of state, claiming that the state mischaracterized the substance of the proposal in titling it on the ballot. 

Proposition 22 has drawn national attention, as the issue of independent worker classification continues to be battled out in state legislatures and courtrooms.  Some have suggested that Proposition 22—which maintains independent worker status, while requiring companies to provide certain benefits historically provided by traditional employers—may represent an alternative approach to worker classification in the 21^st century workforce.  Still others have called on policymakers to engage in a dialogue about workplace modernization, and adopt proposals that promote choice, flexibility, and economic opportunity for workers.  This discussion remains vital because Proposition 22 would only impact transportation network companies and delivery network companies.  Other businesses in California would still need to grapple with AB 5 and its multitude of complex “exceptions.”

Conclusion

Many in our society are longing for things to get back to “normal,” the way things were before the coronavirus upended our way of life.  And as segments of our economy gradually reopen, we are seeing a return to many activities that previously were paused.  Those activities now include California’s ongoing prosecution – through various avenues – of independent contractors and the platforms that engage them.  California’s legislature was closed for much of the 2020 session.  It is now open and considering a host of new labor and employment laws.  California courts were also closed.  They have reopened.  Our state law enforcement officials are bringing suits alleging misclassification of workers, and the plaintiffs’ bar is active in this area as well. 

But many have expressed the opinion that this is not the best time for our society to mount such attacks on the independent contractor model.  We are facing double-digit unemployment and the specter of a prolonged recession.  Our unemployment insurance funds have been taxed to the breaking point.  Workers need to work.  The so-called gig economy can provide that work, quickly, to those who need it.  And of course, the sweep of AB 5 goes far beyond the gig economy – it impacts virtually all aspects of all businesses in California.

Especially concerning is the ongoing uncertainty that this entire debate presents for workers, businesses, and our society as a whole.  Nobody can predict today how all of this will be resolved.  There are a multitude of moving parts here – the question of retroactivity of Dynamex and AB 5, Proposition 22, AB 2257, civil enforcement actions, lawsuits challenging AB 5 – which could interact with each other in a multitude of unforeseen ways.  The question of retroactivity alone is enormous.  If Dynamex ultimately is found to be retroactive, a flood of litigation will result, and the potentially crushing liability will be imposed on some of the state’s largest businesses, which provide work for hundreds of thousands of Californians.  Uncertainty and unpredictability do not foster innovation, investment and economic growth, and will likely restrict any attempts to dig our way out of the current recession. 

It also appears as though California’s version of the ABC test may gain traction in other states, and at the federal level as well.  For example, legislation similar to AB 5 has been discussed in New York state along with alternatives that provide bargaining rights for independent contractors in the form of sectoral bargaining.  New Jersey had fierce debates about the ABC test with no result but the legislation may surface again.  Rumors abound over other states contemplating legislative enactment, wondering if they should follow the California path. This has led some business owners to state they may relocate. 

Meanwhile, at the federal level, the PRO Act, which would dramatically amend the National Labor Relations Act, expressly adopts the ABC test. The U.S. House of Representatives passed the PRO Act this year on a mostly party-line vote, but the bill was not considered by the U.S. Senate.  With the November 3 elections around the corner, the PRO Act may well gain more traction in both Houses of Congress and also at the White House.   

Much has been written about novel California employment laws being considered and adopted in other parts of the country.  That trend likely will continue with AB 5.

As the Workplace Policy Institute called for one year ago, our society should be looking for ways to better address the structural issues that hamper innovation and growth.  Engaging employees is a complex, time-consuming process, and compliance with the myriad employment and labor laws is challenging.  Perhaps if more flexibility were allowed within the employer-employee framework, the independent contractor model would not be so attractive.  Perhaps another model – something in between employment and independent contracting (such as the status contemplated under Proposition 22)—is possible. 

But these possibilities seem to be beyond the scope of our ability to debate and discuss.  AB 2257 provides some relief, to some industries and some contractors.  But it falls short of addressing the fundamental problems of the ABC test itself.  For example, what is the “usual course of business” of a business?  The “B” prong is subject to endless debate.  And what about the failure of the legislature to provide for any integration between AB 5 and the California Corporations Code?  The Corporations Code recognizes many different business structures, but under AB 5, a “business owner” can completely disregard those structures and claim that they should have been classified as an employee.  These legal questions apparently will be with us for years to come.

It appears as though the arc of California’s approach to the issue of independent contractors is set.  We seem destined to battle these important issues out in the courthouse and at the ballot box. 

But we at the Workplace Policy Institute submit that we must look for a better way to address these issues.  We should continue to search for ways to allow our modern and dynamic economy to thrive.  We should be creative and innovative in our approach to the challenges of the employment-independent contractor debate.  And we should remember that, above all, this is about people – workers and business owners who contribute much to the fabric of our society.  We must continue to strive for better ways to establish policy that meets the challenges of our modern workplace.