From the courts to the Capitol, an epic labor battle may redefine the shape of the American workplace Monday, August 26, 2019
By Nicole Gearing
The growth of the gig economy and the endless appetite of U.S. consumers for products and services have combined to produce stark changes in the American workforce – and a pitched battle in the California state Capitol.
Jobs once held by salaried employees increasingly are filled by part-time contractors. From Uber and Lyft to nail salons and trucking companies, folks are working their own side-hustle, trading full-time benefits like health care and a biweekly paycheck for command of their own work schedules.
By classifying workers as independent contractors rather than employees, tech companies and other industries have boosted profits. Instead of salary, hourly wages are paid for time worked. Companies avoid the costs of health care and other benefits full-time employees enjoy as well as a slew of basic worker protections, including unemployment and disability insurance, workers compensation, Social Security contributions, family leave, Medicare and guaranteed minimum wage.
In the quest for profits, some companies have deliberately misclassified their workers as contractors rather than employees to cut labor costs.
That can also have an impact on government coffers. In California, officials estimate that the state is losing upwards of $7 billion a year in forgone payroll tax revenue. In a 2009 memo from the U.S. Treasury Department, the deputy inspector for audit wrote that employers deliberately misclassifying workers to cut costs and gain a greater competitive edge have seen a 30% cut in labor expenses.
Labor unions, not surprisingly, have bristled over the proliferation of gig-economy contractors, a phenomenon they believe robs the American workforce of proper wages and benefits.
The resulting tug-of-war has stretched from the California Supreme Court to the state Capitol. It may end up redefining how the gig economy operates and the shape of the American workplace.
The story starts back in 2004 with Dynamex Operations West, Inc., a same-day courier and delivery company. The firm became entangled in a class action lawsuit over claims that Dynamex’s misclassification of workers as independent contractors was a violation of the Industrial Welfare Committee’s wage order that governed the transportation industry.
Dynamex employees argued in the suit that the company had taken regular salaried jobs with benefits and misclassified them as independent contractors, even though they were continuing to do the same work they had as employees. Despite being independent contractors, drivers for Dynamex were made to wear Dynamex uniforms and adhere to restrictive hours and performance numbers, all while being denied basic worker’s rights such as guaranteed minimum wage.
Making its way through the lower courts, the lawsuit became a battle over which of two worker classification methods would be used as the precedent for Dynamex’s case.
The first classification method came from a previously decided court case, Martinez v. Combs (2010), that established three definitions for employment:
1. To exercise control over hours, wages and working conditions
2. To suffer or permit work
3. To engage thereby creating a common-law employment relationship
Martinez applied to joint employer analysis, under the pretense that the worker is already recognized as an employee. This assumption that the worker is recognized as an employee is the exact reason that Dynamex argued against this method of classification and instead opted for the Borello test, coming from the Supreme Court case Borello and Sons Inc. v. Department of Industrial Relations.
The Borello test includes threshold questions of whether a worker is an employee or independent contractor, stating that the “right to control” the means and manner in which work is performed is the most important factor to be considered when evaluating classification, along with equipment ownership and opportunity for profit and loss.
In comparison to the Martinez definitions, the Borello test is much more flexible and looks at each factor of individual cases. Attorneys for Dynamex suggested that the Borello test should be used in the determination of classification for the company’s workers. They felt the Martinez definitions did not apply to classification analysis, but rather to employer relationships, which was not the argument at hand.
California’s Supreme Court decided otherwise.
Its ruling on April 30, 2018 found that the Martinez definitions were not limited to joint employer analysis and that if any of the three definitions were met, the worker was indeed an employee and not an independent contractor.
In addition to reaffirming Martinez, the court did concede that the second definition, “suffer or permit to work,” could not be interpreted literally as it would unravel the distinction from legitimate independent contractors from employees.
To limit the scope of “suffer or permit to work” the Supreme Court implemented an “ABC test.” It declares that a worker is deemed to have “suffered or permitted to work” and is thus is an employee for wage order purposes unless the putative employer proves:
A) The worker is free from the control and direction of the hiring entity in connection with the performance of work, both under the contract for the performance of the work and in fact.
B) That the worker performs work that is outside the usual course of the hiring entity’s business.
C) That the worker is customarily engaged in an independently established trade, occupation or business of the same matter as the work performed.
Each of these requirements need to be met in order for the court to recognize the worker as an independent contractor.
Despite its status as a California Supreme Court decree, the Dynamex decision is hardly practiced and recognized in law. Seeking to give the ruling a broader sweep in the state workplace, Assemblywoman Lorena Gonzalez (D-San Diego) introduced legislation in early 2019 to codify the Dynamex ruling as California statutory law.
The upshot of her legislative effort is that Assembly Bill 5 would make it much more difficult to label workers as independent contractors instead of employees, a result that would cleve the practice of companies misclassifying salaried employees as private contractors as a tactic for avoiding state and federal labor laws.
Assemblymember Gonzalez has expressed hope that AB 5 will “create an opportunity for workers to make minimum wage, earn overtime, sick leave, employment insurance as well as authorize the right to form a union and collectively bargain.” Instead of being forced to file suit on a case by case basis to seek enforcement of their rights, workers would be able to seek the intervention of state labor regulators.
With most gig companies in violation of part B of the “ABC test,” it is no surprise that tech firms and dot-com industries are lobbying heavily against AB 5. They’ve been joined by small businesses that likely could fall victim to AB 5’s unintended reach.
According to Pro-Small Biz California president Jack Frost, small businesses rely heavily on third party providers working as independent contractors to help create efficiencies and insure a profitable bottom-line. With the reclassification of independent contractors, small businesses may find it harder to stay afloat in the face of rising labor costs.
Industry exemptions from AB 5 have already been instituted for physicians, insurance agents and brokers, direct salespersons, real estate agents, hair stylists and barbers, lawyers, dentists, architects, engineers, accountants and several other professional classifications.
But the California Chamber of Commerce and other pro-business groups are seeking more industry and profession exemptions from AB 5.
The trucking industry is another to oppose AB 5, arguing that the reclassification of independent contractors to employees would devastate many in the industry.
Thien Tran, a trucking owner and operator, describes how his potential worker reclassification would destroy the $200,000 worth of savings and credit he used to buy his commercial truck and start his business.
“If I were an employee, I wouldn’t be able to pick the jobs I go on,” said Tran, “I would make less money and lose everything I put into my business.”
The loss of flexibility for gig economy workers is the tune that big companies are humming in their battle against AB 5.
Many argue that with the reclassification as employees, gig workers would lose the freedom to put in hours entirely on their own schedules, which allows them to mix work with their other pursuits. It’s a characteristic of the gig economy that can be particularly helpful for low-skilled workers seeking to attend school and build better careers.
But not everyone is buying this flexibility plea that big businesses are selling.
Steve Smith of the California Labor Federation argues that AB 5 doesn’t dictate a move away from employee flexibility, noting that several companies operate on the basis of flexibility while recognizing their workers as employees.
Konstantine Anthony, a 38-year-old Uber driver, is one of many not buying big businesses ploy for maintaining flexibility.
“Uber and Lyft are trying to say that if this law goes through, we’ll lose our flexibility,” Anthony said. “But that is a lie. They’ve already taken many steps to reduce my flexibility as a driver.”
It’s no secret that organized labor sees AB 5 as an opportunity to create new classes of workers who could become union members.
Al Aloudi, 35, enjoys his job as a driver for Uber and Lyft but can’t even afford his diabetes medication or support his family from the pay he brings home for driving 60 to 80 hours a week. Even on a busy day, Aloudi says his hourly take-home pay mostly fails to match minimum wage.
Seeking a compromise that would keep their workers as independent contractors, gig companies are coming together to establish a third category of worker: one who is still an independent contractor but is provided a package of benefits to choose from and the ability to band together and negotiate.
Just as some gig companies are not unwilling to provide benefits in a cafeteria-style package specific to each independent contractor, many of their workers are not unwilling to remain independent contractors — they just express a desire to be treated like a true independent contractor.
Edward Escobar, a San Francisco based Uber and Lyft driver, explains that he and many other drivers are fine with remaining contractors as long as they are truly independent.
“An electrician or plumber sets their own rates, terms and conditions,” Escobar said. “That’s what we want. Uber and Lyft have done a bait and switch; they are undermining what it means to be an independent contractor.”