In California, Legislative Negotiations over the Worker Classification Question Continue

Marissa Marandola

Marissa Marandola is a student at Harvard Law School.

As OnLabor reported last month, in the wake of the California Supreme Court’s ruling in Dynamex Operations West, Inc., the California State Legislature is considering several bills this session that would address the question of how to determine whether a worker is an independent contractor or an employee under California labor and employment law.  The most prominent of these, AB-5, is sponsored by the California Labor Federation and would codify the three-pronged ABC test Dynamex introduced in state law.  It was initially introduced by Assembly Member Lorena Gonzalez (D-San Diego) as a placeholder bill.  Gonzalez put forth an amended version of AB-5 on March 26 that adds some detail to the bill’s general aspiration of codifying the Dynamex decision.

In its current form, AB-5 would explicitly write the three prongs of the ABC test, as articulated in Dynamex, into state statutory law and confirm that the ABC test is California’s employment status test for all labor and employment-related claims under state law, aside from claims for which the state Labor Code provides an alternative definition of “employee.”  The language of AB-5 thus clarifies earlier confusion as to the anticipated reach of the ABC test: Gonzalez has stated that the revised bill would affirmatively expand the ABC test beyond the wage and hour context in which Dynamex was decided to apply to workers’ claims for overtime, minimum wage, workers’ compensation, unemployment insurance, paid family and medical leave, and organizing rights.

The amended bill also sets up four occupation-specific exceptions to AB-5’s coverage for licensed insurance brokers, physicians and surgeons, licensed securities brokers and investment advisers, and direct salespersons.  For these workers, the laxer, multifactor Borello standard would continue to govern their classification as independent contractors or employees.  The proposed exemptions appear to respond directly to concerns raised by the California business community that the rigorous “B” prong of the Dynamex test, which states that a worker who performs work within the usual course of the hiring entity’s business is an employee, not a contractor, would risk classifying as employees some bona fide independent contractors in industries with a longstanding, mutually beneficial practice of entering contractor arrangements.  They also align with previous statements by the California Labor Federation and other labor advocates supporting carve-outs to AB-5’s coverage for high-wage workers and industries with unique employment models.  On April 3, following a well-attended hearing, the Assembly’s Committee on Labor and Employment unanimously advanced AB-5 as amended out of committee with a referral to the Committee on Appropriations.

Two other bills related to the worker classification question have made little progress in the Legislature.  AB-71, which would overturn Dynamex and reestablish the Borello standard as the employment status test for all California workers, was referred to the Assembly’s Committee on Labor and Employment twice, but no further action has been taken.  With Democrats holding a supermajority in the state Legislature, AB-71’s odds of success remain extremely low.  AB-233, which would exempt licensed insurance agents and brokers from the Dynamex test, was referred to the Assembly’s Insurance and Labor and Employment Committees.  However, it has now largely been integrated into AB-5 as amended through the newly added licensed insurance broker exception.  Debate from this point forward, it seems, will focus on further modifications to AB-5’s language and exemptions.

California business groups, aware that AB-5 is quickly gaining traction, continue to push for additional exceptions to be included in the bill.  On April 1, a coalition of business groups and industry associations submitted a letter to the Assembly’s Labor and Employment Committee.  The signatories wrote that they would back a further-amended version of AB-5 that features occupation-specific exceptions to the ABC test for consultants, travel agents, therapists, real estate agents, hair stylists, and truck, taxi, and gig economy drivers, among others, as well as exemptions for business-to-business contracts and short-term projects.  Gonzalez called the group’s proposals “too broad,” but said that she would continue to “work industry-by-industry” to identify and incorporate appropriate occupation-specific exemptions, naming exemptions for hair stylists and real estate agents as possibilities under consideration.  The California Labor Federation, which jointly drafted AB-5 with Gonzalez, is reluctant to move beyond industry- and occupation-specific exceptions to more sweeping carve-outs.

The status of gig economy workers remains a sticking point in negotiations.  Gig companies want to reach a compromise that would allow them to continue to classify their workers as independent contractors.  The main proposal being discussed is a program under which the companies would provide pro-rated portable benefits in exchange for continued application of the employer-favorable Borello test to their workers.  Gonzalez has cautioned that any offer that would persuade her to consider a gig-economy exception would have to ensure substantive worker protections, “not just some lip-service right to organize and not portable benefits that don’t get to the full type of benefits employees enjoy.”  An “app-based-exemption,” she says, is a nonstarter, a stance backed by the California Labor Federation.

Democratic Governor Gavin Newsom’s position on AB-5 and its impact on the tech sector and the gig economy, to which he has substantial ties, is still not clear.  He is thought unlikely to support a bill that alienates either labor or tech, and continues to facilitate negotiations between the two sides in the hopes of brokering a deal.  But if the gig companies insist on a total carve-out without offering sufficient security for their workers, Gonzalez and her labor allies may walk away from the table, Newsom’s preference for a deal notwithstanding.  Given that Democrats command a veto-proof majority in the Legislature, Newsom’s support may not determine either AB-5’s final form or its chances of becoming law if Gonzalez can come up with the right combination of occupation-specific exceptions to assuage business leaders’ concerns and keep moderate Democrats on board.

Even if AB-5 fails to become law this session, the worker classification debate in California and across the nation will continue.  A federal judge dismissed the major courtroom challenge to the Dynamex decision, a suit brought by the largest trucking association on the West Coast, on March 28.  The court held that neither the Federal Aviation Administration Authorization Act and its implementing regulations nor the dormant commerce clause preempt the ABC test announced in Dynamex as applied to California wage and hour laws.  The trucking association plans to appeal the decision to the Ninth Circuit, but in the meantime, the ABC test in the wage and hour context remains good law in California regardless of AB-5’s fate.  And so the fight over employee status will go on, in both the courthouse and the state house, with the rest of the country waiting to see what California will decide.

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