Updated: Sep 25, 2019
It’s time for marketplaces to unite.
California’s Assembly Bill 5, also known simply as “AB5,” is set to become law - it goes into effect January 1, 2020. What many in the marketplace ecosystem have not considered until recently, especially those headquartered outside of California and those without operations in the State, is how AB5 may adversely impact their business. The reality is that AB5 in its current form could impede the future of the marketplace business model and severely limit the opportunities afforded to millions of workers who find work through marketplaces, in addition to limiting consumer choice for services available through marketplaces. So, it’s time for marketplaces to work together to come up with a solution to AB5 - this is our opportunity to work together to build marketplace businesses and grow the workforce, while improving conditions for workers and benefitting consumers.
At its core, AB5 codifies the California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court, (2018) 4 Cal.5th 903, by adopting the “ABC” test to determine whether workers are employees or independent contractors. Simply put, under the ABC test, workers are independent contractors only if the workers are free from the control of the hiring entity, the workers perform work “outside the usual course of the hiring entity’s business,” and the workers customarily work or are engaged in an independent trade. The ABC test, as it turns out, is one of the strictest tests for classifying workers as employees or independent contractors.
AB5 has been spearheaded largely by unions and appears mainly targeted at Uber and Lyft, citing the lack of benefits and protections for their workers, including minimum wage, unemployment insurance, workers’ compensation, sick leave, family leave, and protection against discrimination and harassment. While it is well intentioned, AB5 in its current form is likely going to do more harm than good. Of the estimated 400,000-strong California marketplace workforce, many will lose opportunities to work because there is simply no way that marketplaces can afford to classify these workers as employees and thus, afford the attendant costs. Beyond that, classifying those 400,000 workers as employees seems incongruent to the circumstances of the services they perform. And, there are alternative solutions to guarantee benefits and protections to workers that stop short of classifying them as employees.
Proponents of AB5 argue that marketplace workers are entitled to the benefits of traditional employment. While that may not be the case in every instance, workers should be afforded certain protections and benefits. And, there are certainly common-sense solutions that could make that happen. Before evaluating each one in turn, let’s consider ordinary circumstances of work available through marketplaces. First, workers are able to work when they choose. There is no requirement that workers show up at a certain time each day, that they show up on consecutive days, or that they show up at all. Second, workers may, and many do, work for competitive marketplaces simultaneously. It is not uncommon for workers to work for Uber and Lyft or DoorDash and GrubHub, or all of them, together. And, while some workers turn to marketplaces for full-time work, most are just trying to supplement their income or make extra money (and may already have part-time or full-time jobs). So, let’s look at the most common cited benefits and protections...
Minimum wage. Everyone deserves to earn a living, minimum wage. As President Obama rightly argued when raising the minimum wage for federal workers, “In the richest nation on earth, nobody who works full-time should have to live in poverty.” Who can argue with that? However, the nature of work on many marketplaces is quick, episodic work, often taking only minutes to complete. Because of the nature of this work, it can be difficult to guarantee a minimum wage is paid for time actually worked (vs time spent on personal or unrelated errands between tasks). Additionally, where workers set their rates, how can marketplaces be required to guarantee a minimum wage when, in fact, the marketplaces have no control over the rate set by workers? If workers set their rates below minimum wage, marketplaces should not be required to subsidize these rates. That's a race to the bottom. A reasonable compromise would be to apply a minimum wage for the hours worked through a marketplace and, perhaps, a minimum threshold of hours worked in a week for that marketplace. In other words, a worker who works, say, 25 hours for a marketplace should be guaranteed minimum wage for the hours worked through that marketplace. On the other hand, a worker who completes one task and never returns, might not qualify.
Unemployment insurance. Full-time employees are eligible to receive unemployment benefits when they find themselves unemployed through no fault of their own. Unemployment “Insurance,” as it is known, is administered by the state and funded by payroll taxes levied against employers. In the case where marketplace workers choose the frequency of work for themselves - if and when they work - it is hard to fathom that marketplaces would be responsible for unemployment insurance, and for workers to earn unemployment benefits, for periods when workers decide not to work. That is, taxes levied against the marketplace should not subsidize a worker's decision not to work. The beauty of marketplaces is that there are many competitors providing the exact same service. So, if workers are unable to secure enough work on one marketplace, they can easily find work on other, competitive marketplaces, often performing the exact same service and thus, eliminating the need for unemployment benefits.
Workers’ compensation. Workers’ compensation programs provide for the payment of lost wages, medical treatment and rehabilitation services for workers injured on the job. As a baseline, workers should be protected no matter how they are classified. However, there are more sensible ways to attain this benefit that fall far short of classifying workers as employees. In other words, workers need not be classified as employees to provide compensation for ‘workplace’ injuries. There are simple solutions, such as occupational accident insurance, that are readily available through insurance companies. And, while occupational accident insurance is traditionally purchased by workers, themselves, many marketplaces make it available to the workers for purchase or purchase it on their behalf. Certainly, one could imagine a world in which occupational accident insurance would be required for workers such that the traditional workers' compensation benefit (and protection) is achieved. And, who knows, perhaps it becomes a competitive benefit for marketplaces to offer the insurance.
Sick leave and family leave. Under the federal Family and Medical Leave Act, employees are guaranteed unpaid leave for family and medical reasons, and employers are required to offer employees their positions under the same terms and conditions when employees return. At the federal level, the job-protected leave is unpaid, and employees are not entitled to compensation during leave. While some states do mandate paid leave, this is not a requirement under federal and many other states’ laws. The reality is that marketplace workers enjoy this benefit de facto. That is, workers may take ‘leave’ at any time and for any reason without repercussion, including for sickness or family matters. When workers return to the marketplace, they may begin working under the same terms and conditions as if they had not taken leave in the first place. Much like minimum wage protections, perhaps a solution here would be to extend state-mandated, paid leave to workers who meet certain hourly work thresholds.
Discrimination and harassment. It goes without saying that discrimination and harassment should not be tolerated under any circumstance, including for employees and independent contractors. In many contexts, current laws outlaw discrimination and harassment, including in employment. Where those laws fall short of protecting independent contractors, the application of existing laws should be broadened. Or, new laws should be enacted outlawing discrimination and harassment in contexts not currently covered by law so that independent contractors are protected. We should not, however, be classifying workers as employees in order to fit them within current, inadequate laws outlawing discrimination and harassment - those laws should apply to all workers in all circumstances.
It's important to note that none of the solutions outlined above have been endorsed or agreed to by any organizations or marketplaces. Rather, they simply demonstrate that there are common-sense solutions to protect workers without adversely impacting those workers' opportunities or the marketplaces that offer them. For the benefit of workers in California and across the country, and for the benefit of an entire industry, it is incumbent upon marketplaces to unite to fix AB5 in a way that enables marketplaces to thrive and workers to be protected. If we don’t come together, AB5 may become the model for many other states. So, let’s band together to protect the future. If you want to get involved, reach out to us at firstname.lastname@example.org.
For more on AB5, check out Seyfarth Shaw’s recent Client Alert.