A Primer to Prepare for the Labor Fight of the Century

One of the most oft-mentioned new laws by many transportation policymakers and industry stakeholders over the last year and throughout 2020 is the infamous acronym “A.B. 5.” The term stands for “Assembly Bill 5,” which was introduced during the 2019 term of the California legislative session, and its notoriety has stuck in progressive circles and is now a term of art representing a bold (or some might say radical) approach to reclassifying transportation and other independent contractors as employees, with profound implications for the industry and workers.

This article tracks the history of the passage of A.B. 5 in California, and the current court challenges and other legislative efforts to stop, limit, or curtail its effect, as well as explain the basic structure and implications of this new law. I will also discuss the latest efforts in New York State to address worker classification, including the pending legislation in 2020, Governor Andrew M. Cuomo’s position, and lobbying efforts and varying opinions by industry stakeholders.

The Origins of A.B. 5 in California

In September 2019, California passed A.B. 5, the new law that makes it much more difficult for companies – especially those in the gig economy – to claim workers in California are independent contractors instead of employees. In other words, the business must provide these workers with workplace rights and protections, including a minimum wage, overtime pay, rest breaks, workers’ compensation, unemployment insurance, paid sick leave, paid family leave, and health insurance benefits.

The new law, which went into effect January 1, 2020, uses a three-part test, known as the “ABC test,” to determine whether a worker is an employee or an independent contractor. The ABC test is a broad test for employee status that presumes that workers are employees unless they: (A) are free from control by the putative employer; (B) are doing work that is outside the usual course of business of the putative employer; and (C) are engaged in an independently-established business.  If a company fails to establish even one of these three factors, then the worker will be considered an employee.

The ABC test is not new in California or elsewhere. Twenty-six states use some version of it in their unemployment laws. Ten states, including New York, apply it broadly to labor laws within a particular sector – typically, construction or landscaping. A.B. 5 codified the California Supreme Court’s 2018 ruling in Dynamex Operations West, Inc. v. Superior Court, (2018) 4 Cal.5th 903 (Dynamex), which established the ABC test as the standard for determining worker classification for the purposes of wage orders adopted by California’s Industrial Welfare Commission (IWC).

Dynamex only applied to wage orders, while the determination of employee or independent contractor status in other contexts was governed by the 11-point test adopted in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”). A.B. 5 expanded the ABC test to cover all provisions of the California Labor Code, while preserving the Borello test for the exempt occupations and professions, or if a court rules that the 3-part ABC test cannot be applied.

How Businesses are Dealing with A.B. 5 in California

There are numerous exemptions in A.B. 5 for certain business-to-business contracts, certain joint employer arrangements, and certain professions and businesses. However, it is expected to apply to all drivers for app-based rideshare and delivery service companies, as well as drivers in the taxi, limousine, and non-emergency medical transport sectors (with some possible exceptions). In California, many taxi companies are structured as co-operatives, meaning each taxi driver is part owner of the company. Since they are technically owners – not hired workers – it is possible that they will be outside the purview of A.B. 5’s ABC test.

Before Uber’s public offering, the company disclosed in its SEC filings that its business would be “adversely affected if drivers were classified as employees instead of independent contractors” and that “any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.”

The Fight for Exemptions in California

Since before the law passed, companies that rely on independent contractors have been lobbying to find a way out of reclassifying their workforce. Uber and Lyft, along with food delivery service DoorDash, pledged to spend $110 million to fight the legislation. After California Governor Gavin Newsom signed A.B. 5 into law, the group launched the “Protect App-Based Drivers & Services” campaign to put a referendum on California’s 2020 ballot, asking voters to exempt app-based rideshare and delivery services from A.B. 5. If the group collects the 623,212 valid signatures required to qualify the measure, it would appear on the November 2020 general election ballot.

As part of the ballot initiative, app-based rideshare and delivery service companies would pay drivers at least 20% more than the minimum wage, plus 30 cents per mile to cover expenses, with the potential to earn more without any limits on how much drivers can earn. The companies would also pay drivers a healthcare stipend that is consistent with employer contributions under the Affordable Care Act – and eligible drivers could receive the health care stipend from more than one company. Drivers would also receive occupational accident insurance to cover medical expenses and lost income resulting from on-the-job injuries, including disability payments. The app-companies would also pay for automobile liability insurance. The companies also said they would push for sectoral bargaining, which would allow drivers to band together in labor negotiations.

The Taxicab Paratransit Association of California (TPAC) had tried to work with the state Legislature to exempt taxi drivers from A.B. 5, but was apparently unsuccessful. The Greater California Livery Association (GCLA) supported the bill, noting that the law’s potential impact on transportation network companies (TNCs) in California “could really impact our industry for the better.”

A.B. 5 Related Litigation in California

On December 31, 2019 – the day before A.B. 5 went into effect – a U.S. district court judge temporarily blocked the law from being enforced against the commercial trucking industry. In November 2019, the California Trucking Association filed a challenge in the Southern District of California, arguing that the law is preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA) – a federal statute that bars state laws relating “to a price, route or service of any motor carrier… with respect to the transportation of property” – as well as the commerce and supremacy clauses of the U.S. Constitution.

United States District Judge Roger Benitez granted the TRO after finding that A.B. 5 is likely preempted by the FAAAA because it “effectively mandates that motor carriers treat owner-operators as employees, rather than as the independent contractors that they are.”

On January 8, 2020, a California state court judge in a different lawsuit also found that the requirements of the ABC test “clearly run afoul” of the FAAAA and cannot be applied to the defendants in a case brought by the Los Angeles City Attorney’s Office in January 2018 – before Dynamex was issued and before A.B. 5 was passed – alleging that the defendant trucking companies misclassified drivers.

Uber and Postmates, along with two drivers, also filed a lawsuit on December 30 2019, seeking to block A.B. 5, arguing the law is “irrational and unconstitutional” and violates drivers’ due process by infringing on their “fundamental liberty to pursue their chosen work as independent service providers and technology companies in the on-demand economy.”

Compliance with A.B. 5

In case the lobbying and lawsuits fail, companies trying to hold onto an independent contractor model are taking steps to ensure they are treating drivers as business owners who are running their own businesses. Shortly after the New Year, Uber announced that it would be making changes so that drivers would be more in control of their work. As an example, drivers will see trip information upfront and fares will be more transparent so they can make informed decisions about whether to accept the trip. Under the new policy, fares will be based on the actual time and distance rates, and drivers will receive the entire fare, less Uber’s commission (capped at 25%) and payments will go directly into the driver’s account. The company will also stop penalizing drivers who decline trips, and passengers will be able to request their favorite drivers for pre-arranged trips. In a letter to riders, Uber warned that more independence for drivers could mean longer wait times and increased prices to riders.

What’s Happening in New York?

The California law has no direct effect on workers in New York, but California may trigger an avalanche across the U.S., with the next rocks falling on the east coast.  New York already applies the ABC test broadly to labor laws within the construction and commercial goods transportation sectors. This year, Governor Andrew M. Cuomo and state legislative leaders have declared that addressing worker classification in the gig economy will be a priority in New York.

Shortly after A.B. 5 was passed, Governor Cuomo signaled he would be open to new labor standards for gig economy workers and that he wants to move employees away from “independent contractor” status. In the Governor’s 2020 State of the State address, he vowed to extend employee protections and rights to workers in the gig economy as part of his “economic justice crusade.” In his speech, the Governor called out drivers specifically as a group that is being exploited by unnamed large corporations and called the practice of classifying workers as independent contractors “exploitive, abusive,” a “scam,” and “fraud,” declaring that “it must stop and it has to stop here and now!”

In the briefing book of legislative proposals that was released along with the State of the State address, introducing legislation to provide workers with basic employee protections and necessary benefits is part of the Governor’s opportunity agenda for 2020. While the Governor has not explicitly said that he plans sweeping A.B. 5-like legislation, his remarks hint at reclassifying more workers as employees for the purposes of wage laws, unemployment, and disability laws.

The New York State legislature has already made it clear that tackling worker classification in the gig economy is a priority this year. In late 2019, both houses of the New York legislature held hearings on worker classification and the gig economy. In October 2019, the New York Senate Standing Committee on Internet and Technology held a public hearing to identify the needs of workers and employers operating outside the traditional employee-employer dynamic to determine possible legislative avenues, including the Dependent Worker Act (S6538/A8343). In October, the bill’s sponsors, State Senator Diane Savino and Assemblymember Marcos Crespo publicly stated that they would “probably move in a different direction” when they returned to Albany in January. Savino added that they are trying to come up with a “more workable ABC model” that includes collective bargaining, calling legislation that fails to include collective bargaining “an absolute nonstarter.”

In December 2019, the New York Assembly Standing Committee on Labor held a public hearing to examine legislative proposals, including proposals to adopt an “ABC” test in New York (S6699/A8721), that aim to extend labor rights and protections to workers in the gig economy and the feasibility of extending such rights and protections to a diverse workforce.

The New York ABC “test” bill (S6699/A8721), introduced by State Senator Robert Jackson and Assembly Member Deborah Glick in Fall 2019, would amend the labor law and the workers’ compensation law, in relation to the employee status of an individual. According to the sponsors, the bill is intended “to reclassify more workers as employees rather than independent contractors in order for them to receive benefits such as healthcare and retirement.” Uber, Lyft, and Amazon are specifically named as large corporations that benefit from being able to classify their workers as independent contractors. Currently, there are no exemptions or carve-outs for anyone in the bill.

Who Wants What?

Various transportation industry stakeholders testified and provided written statements for the state legislative hearings, including Uber, the Independent Drivers Guild (IDG), the New York Taxi Workers Alliance (NYTWA), Livery Base Owners, and the Livery Round Table.

Uber is vehemently opposed to having its drivers classified as employees instead of independent contractors, which it sees as a threat to its business. The company and others are advocating for a “third way” to classify gig economy workers that maintains flexibility and expands worker protections, working conditions, and benefits. In written testimony submitted to the New York State Senate, Uber said current U.S. labor law restricts its ability to provide any benefits to drivers without it being used against them in the context of worker classification. Uber also argued that the platform economy operates differently in New York City than it does in less-populated areas of the state, and cautions against a one-size-fits-all approach, noting that Uber drivers in New York City are already protected by a local law that guarantees minimum earnings.

The IDG wants collective bargaining rights for ride-hail drivers and is calling on New York State to pass legislation giving ride-hail drivers the right to unionize with collective and sectoral bargaining agreements. The group opposes classifying drivers as employees through A.B. 5-like legislation because it would give them some employment rights but not, importantly, the group believes, the right to form a union. The IDG also believes that designating drivers in New York City as employees would put New York City drivers’ minimum earnings in jeopardy.

The NYTWA is pushing for New York to pass legislation adopting an “ABC” test like California’s A.B. 5. The NYTWA is part of the NY Do It Right Employment Classification Test (DIRECT) Coalition of labor advocates and community organizers that is working to pass an “ABC” test bill in New York.

The Livery Round Table and the Livery Base Owners, Inc., are against applying the “ABC” test to livery bases and further oppose “dependent worker” classification for livery drivers. Both groups essentially argue that the livery business model is incongruous with classifying drivers as employees because livery bases do not pay drivers – instead, the drivers pay to receive dispatch calls from the bases or licensed businesses – and drivers decide when and where to work. The livery groups are asking for a carve-out from any worker classification law for livery bases.

Based on the legislation and litigation in California, and the anticipated fast-tracking of the New York State legislative proposals, 2020 is shaping up to be a year in which the “disrupters” in the gig economy face significant disruption of their business models. As we enter this new decade, the battle is now shaping up within the labor rights community as to whether unions will resurface in the for-hire transportation sector, or whether some new labor model might prevail – something in between full employment and pure independent contractors (with some benefits, but no unionization or right to control working hours). The battle is just beginning and the repercussions will change the landscape of the industry for decades to come.

Article by Matthew W. Daus, Esq.
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