After it passed the California Assembly earlier this year, that state's Senate is set to begin hearings this week on a sweeping reform to the way employers classify their workers as either employees or contractors. Assembly Bill 5 would codify a landmark state supreme court ruling that raised the bar for when companies can legally classify folks as independent contractors.
Among other things, the court’s ruling says the scope of work being done must be outside the core of a company’s business for the workers to be classified as independent contractors. This is perhaps one of the most aggressive efforts in the country to crack down on what critics call employee misclassification or “payroll fraud.”
As Construction Citizen readers who have followed the issue are well aware, misclassification happens when employers pretend their workers are subcontractors when, by law, they meet the definition of employees and should be compensated as such including benefits. There are of course many legitimate uses of contract labor. The problem arises when unethical employers use the subcontractor designation to skirt the law and avoid payroll taxes, health benefits, retirement plans, and more. This allows those companies to underbid law-abiding firms by significant amounts. It is especially rampant in construction but other industries are not immune.
Explaining the California Supreme Court’s ruling in what has become known as the “Dynamex Decision,” attorney Timothy Kim wrote on Labor & Employment Blog: “In particular, the Court embraced a standard presuming that all workers are employees instead of contractors, and placed the burden on any entity classifying an individual as an independent contractor of establishing that such classification is proper under the newly adopted ‘ABC test.’”
In other words, this greatly narrows the conditions under which a worker can be classified as a contractor. And it is worth the attention of employers and workers in other parts of the country because large states like Texas and California often lead the way on policies that will eventually be adopted elsewhere.
The legislation under consideration mirrors the court’s ruling. Under the bill, the answer must be "yes" to each of the following for a worker to be legally classified as an independent contractor:
- The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
- The worker performs work that is outside the usual course of the hirer's business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer
If the bill is passed by the Senate and signed by Gov. Gavin Newsom, hundreds of thousands of Californians stand to gain access to benefits they don’t currently enjoy. The proposal puts Gov. Newsom in a tough spot politically, though, because he would like to appear to be on the side of both the labor unions supporting the bill and the tech giants like Uber and others which do not.
As part of their opposition to the bill, business groups started something called the “I'm Independent Coalition."
“Today, Californians choose to work independently for many reasons: flexibility, quality of life, more control over their work, more economic security, extra money on the side, or simply because they enjoy it,” the business coalition says on its website, noting that 2 million people “choose” to work as independent subcontractors.
“We need the State Legislature to protect our freedom to work independently,” the group said. “It is time to modernize our laws to reflect the way Californians are choosing to work today.”
The author of the bill, Assemblywoman Lorena Gonzalez, is not impressed with those arguments.
“These billion-dollar companies can complain but we have to ask ourselves as taxpayers: Should we subsidize their business by subsidizing their workers?” Gonzalez said to the Times of San Diego, the newspaper where she lives. “That’s what happens when you don’t adequately compensate workers.”
That said, Gonzalez has agreed to exempt certain professions including physicians, insurance agents and brokers, direct sales, realtors, hair stylists and barbers, lawyers, and dentists.
“Does AB 5 have very wide repercussions? Yes, that’s what makes the negotiations very complicated,” said labor rights attorney Bill Sokol, who teaches employment law at San Francisco State University.
“Everything is up for grabs,” Sokol told the same newspaper. “There’s no way to predict who’s going to end up with what. But labor recognizes that the American workplace they have traditionally organized—those worker relationships—have changed, and the laws have not kept up with them.”