The ABCs Of The California Gig Worker Ruling

The ABCs (And ABC Test) Of The California Gig Worker Ruling

There’s a saying in jurisprudence: Hard cases make bad law.

Early this week, a judge denied a request from Uber and Postmates to halt the enforcement of a new California labor law — known as AB5, which was voted into law last year — that would place new restrictions on gig economy workers.

In particular, the law places limits on just who can be classified as a contractor, while also making it harder for platform companies to classify those workers as independent contractors.

The judge ruled that the benefits to the public outweigh the inconveniences that might be suffered by companies like Uber and Postmates.

What’s next? The ruling this week was largely procedural, and the judge did not issue an opinion on the merits of the case.

Thus, the lawsuit may proceed, as Postmates has said it is considering an appeal, while Uber is mulling its next moves. The law took effect at the beginning of this year, and beyond Uber and Postmates, it impacts Lyft, DoorDash and a host of other platform firms.

Companies deemed to have run afoul face fines.

Get ready, then, for the case to get harder, at least in terms of setting up a clash between the government and the private sector over (thus far) unsettled questions like: Just who’s an employee, who’s an independent contractor, when and why? And what it will all cost?

In an interview with Karen Webster, Elaine Turner, shareholder and director focused on employment law at Hall Estill, a law firm based in Oklahoma, said the case trains a spotlight on larger issues — chief among them whether individuals have the right to pursue work on their own terms at the time and place of their choosing, and whether companies who seek to employ them should face restrictions in hiring them.

In California, there’s a three-pronged test — called the ABC test — that requires any company to prove that it does not exert control over how workers perform the job, that the work being performed is outside “the usual course of the company’s business,” and that the worker regularly performs the same job in the same industry independent of that company.

How We Got Here

Turner said the three-pronged ABC test has been around for a while, and “the whole independent contractor vs. employee question has been an issue between the private sector and the government forever.”

But, Turner contended, the issue has increasingly been on the radar for federal and state governments since 2008 when the financial crisis and ensuing recession sent them on a quest to fund new sources of tax revenues.

They seem to have found potential new revenue streams in labor laws that pave the way to filling state and federal coffers. That’s in part due to the fact that employers must meet all three prongs of the ABC test to justify that a worker performing his or her duties is indeed an independent contractor.

If the workers don’t meet all three tests, and the company nonetheless classifies them as independent contractors, fines and penalties accrue to the government. If workers are classified as employees, taxes get withheld — and, of course, are paid to the government. In addition, the ability to receive additional benefits, such as overtime and paid leave, can drastically alter (and increase) the operational cost structure of these firms.

And now it may all be coming to a head.

New Economy and Old Laws

According to Turner, there’s some disconnect underpinning it all, in which old laws are clashing against the needs of a new economy.

“The laws that we’re talking about, the legal concepts that we are talking about, have been around for decades, and they have not evolved along with the U.S. economy or the ways that the workplace has changed,” she said.

At a high level, she said, many individuals want to have independence and, in effect, be their own boss. She maintained that the different platform models on offer through the gig economy give them that opportunity — at a level that allows them to satisfy certain desires with flexibility that was unheard of in 1938. That was the year a large swath of legislation that governs current labor practices crystalized in the Fair Labor Standards Act.

Eighty years can do a lot to change an economy.

As Turner said, labor laws still are rooted in a time when the U.S. was largely an economy driven by manufacturing; nowadays we’re primarily a service economy. Those laws haven’t kept pace, she maintained, and must evolve.

Consider the example offered by Webster in which an UberX driver shows up in a Maserati, and it turns out that the sporadic work as an Uber driver helps pay the bills on that (rather pricey) automobile. It’s gig work honed to a precision point, you might say.

Looking Ahead

In an effort to unpack the details of the California case and see what’s next, Turner said the crux of the current battle hinges on the second part of the ABC test (the B, in other words) and whether Uber is set up as a company that provides driving services, or whether, as the company contends, it is a firm that provides a platform to connect drivers and people who need rides.

In a nod to the “A” part of the test — the pricing — Uber has said it will allow some drivers, through a pilot program, to set their own rates.

But, as to whether Uber and others are going to get a chance to air their arguments on ABC more fully, Turner noted the case is still in the “preliminary stage.”

“We are months away from a ruling on the merits,” she explained.

Once the district court makes a ruling, she said, that order is subject to an appeal to the federal court of the Ninth Circuit. Should the federal court decision be appealed, the case could go to the Supreme Court.

Along the way, Uber and Postmates have maintained, and likely will maintain, that they meet the ABC test, and that the people who drive for them qualify as independent contractors.

But should the law disagree, the financial impact to those companies, and indeed other platforms, could be significant.

“I would not jump out there and say that they are operating in violation of the law,” Turner said. “But I do think it is important that anyone in California — really, anywhere in the United States — if you are utilizing independent contractors, to evaluate those relationships because it can be costly if a court of the government disagrees with you.”

That could be especially true if a group of states follow on to embrace ABC laws, as Turner said might be the case.

The ripple effects are likely to be felt across the online platform industry that matches demand and supply, regardless of vertical, as many of those companies operate across several states.

And, in musing on the verticals, Turner noted there have been divergent views on freelancers, at least in California. She said, “there are a lot of folks who are concerned that AB5 goes exactly in the direction” of forcing platforms to classify workers as employees.

Yet some stakeholders on the “creative” side of the freelance industry — web design, teachers and graphic designers — have gotten enough attention from California to spur an amendment that may make adjustments to AB5.

“The Uber folks, and that type of industry do not seem to be getting that same respect,” said Turner, who surmised the reason may be that drivers are not “intelligent enough to control their own destinies and operate as independent businesspeople.”

That fundamental issue, tied to the economic realities test applied under the Fair Labor Standards Act, may get an airing as the current case wends its way through the courts.

“A couple of the criteria that are examined are the individual’s opportunity to create their own profit and loss, and to be responsible for their own profit and loss,” Turner told Webster. “It seems like the ABC test kind of ignores that.”

Analyzing a freelancer’s day more fully may shed light on the individual’s ability to control their own destiny — to set hours (or take the day off), plan routes to save on expenses and make any number of autonomous decisions. The end result may be that other tests emerge to determine employee status in the age of the platform economy.

For now, the twists and turns lie ahead.

As Turner told Webster: “We are a long way from this lawsuit being over.”