Independent Contractors vs. Employees
Enacted in January 2020, the Assembly Bill 5 (AB5) provides a three-pronged test for entities in California to use when hiring independent contractors. On the other hand, passed in November 2020, Proposition 22 (Prop 22) aims to maintain the status quo, allowing independent contractors to maintain their independence. With that in mind, here’s a more detailed look at how AB5 differs from Prop 22.
Understanding Assembly Bill 5
California Assembly Bill 5 is a piece of legislation that was signed into law by California Governor, Gavin Newsom. The bill focuses on gig workers, requiring companies who use independent contractors to reclassify them as employees. AB5 was propelled from a California Supreme Court Case in 2018, Dynamex Operations West Inc. vs. Superior Court of Los Angeles, in which it was ruled that companies must use a three-pronged test (the ABC Test) in determining if workers can be classified as independent contractors or employees.
The ABC Test essentially assumes that workers are employees unless the hiring company can prove three things:
- The worker is free from the control and direction of the hiring entity
- The worker performs work that is outside of the usual course of the hiring entity business
- The worker is customarily engaged in an independently established trade, occupation, and business.
AB5 has come under fire by some independent contractors, because it has created a higher standard in proving their status as an independent contractor, than was previously used in California. Companies like Lyft and Uber have resisted the requirements of AB5, despite a Superior Court Judge ordering them to reclassify their contract drivers as employees and providing drivers with the same benefits as other staff members.
In an attempt to counter AB5, these same companies heavily supported Prop 22, a ballot initiative that declared app-based drivers to be independent contractors. Californians then voted in Prop 22 in with 58% of voters supporting the initiative.
An In-depth Look at Proposition 22
Proposition 22 is an initiative that was passed by California voters opposing the AB5 law, by classifying app-based employees as independent contractors. Companies like the ride-hailing and food-delivery services largely sponsored the bill in order to keep their workers from becoming classified as employees. In fact, prior to Prop 22, gig companies went to court twice (Olson vs. California and California vs. Uber and Lyft) resulting in a Superior Court ordering the companies to comply with AB5. Both Uber and Lyft threatened to shut down their business in the State of California, but opted to heavily fund Prop 22 instead. The proposition was created as a way to give app-based workers their continued freedom and flexibility as independent contractors.
As independent contractors, workers are afforded less of the legal guarantees that employees receive like benefits and paid leave. However, the initiative does adopt a few labor laws that protect the independent contractors working for transportation and delivery companies such as Lyft, Uber, DoorDash and Instacart. Prop 22 includes a minimum earnings requirement, compensation for additional expenses, non-discrimination protections and ACA compliant healthcare.
Perhaps the most controversial part of Prop 22 is the argument that it allows companies to skirt labor laws and potentiallyexploit workers. Prior to the initiative’s passing, the Labor Center at UC Berkeley reported discouraging consequences for Prop22, specifically related to the worker benefits and earnings than suggested for workers.
How AB5 and Prop 22 Impact Workers
While both AB5 and Prop 22 laws have some effect on the labor industry of California, each has its own specific characteristics.
The biggest implications of AB5 and its ABC test are that it turned workers previously classified as independent contractors into employees. If employers have to classify gig workers as employees, it entitles the workers to minimum wage standards, expense reimbursements, and employee benefits (i.e. health insurance, workers comp). Those same employees would potentially have to adhere to standards like specific working hours,as well.
Prop 22, on the other hand, would allow gig workers to remain independent contractors and retain the freedoms associated with that classification. Although independent contractors are able to decide when and for whom they work, they are often not afforded state and federal labor protections like workplace safety and anti-discrimination laws. As independent contractors, gig workers also remain responsible for their taxes, social security, and miss out on paid leave and unemployment benefits.
How AB5 and Prop 22 Impact Businesses
California businesses that rely on gig workers have been impacted the most by AB5. While some industries, like real estate and insurance are exempt from AB5, companies that are not exempt will be found in violation of the bill’s terms for not properly reclassifying their workers.
The transition for these businesses impacted by AB5 will be costly. In fact, some analysts suggest that the cost of having to now pay former gig workers minimum wage, paid time off and other benefits could bankrupt companies like Lyft, Uber and DoorDash. Not only could the gig worker business model be destroyed, but consumers who use those services will likely have to pay higher costs as a result of the reclassification.
Overall, AB5 aims at recognizing independent contractors as employees while Prop22 still classifies workers as independent contractors. While AB5 is a law set to protect gig economy workers across all industries, Prop 22 only protects app-based workers. Using this comparison of AB5and Prop 22 can help you to properly classify your workers.
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