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Contractor or Employee? California Bill AB 5 May Provide Answer

— October 18, 2019

In order to understand California bill AB 5, you need to understand the California Supreme Court’s decision in Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. That case gave employees certain protections from being misclassified as independent contractors as opposed to employees. The facts surrounding Dynamex aren’t terribly complicated.

The New Classification

Dynamex is a nationwide courier and delivery service. Before 2004, Dynamex classified its drivers in California as employees, but beginning that same year, all of the company’s drivers were converted into being independent contractors. They were now required to provide their own vehicles and insurance and provide for their own transportation expenses, tolls, maintenance and workers’ compensation insurance. They were even required to purchase and wear shirts with large Dynamex logos on them. Dynamex set all delivery rates with customers, and their drivers could elect to be paid on a flat fee or a percentage of the delivery fee. Drivers were allowed to set their own schedules, but they were required to provide Dynamex with the days that they intended to work. Drivers were generally free to select their routes, but they were expected to complete all delivery assignments on the assigned day. They were also free to work anywhere else that they wanted, including their own delivery services.

The Lawsuit

In 2005, the plaintiff entered into a written contract with Dynamex to drive for it. After severing his relationship with the company, the driver filed a lawsuit against Dynamex on his own behalf and on behalf of similarly situated Dynamex drivers alleging that they were misclassified as independent contractors rather than employees. The case worked its way through the courts, and the California Supreme Court ruled that a person will be presumed to be an employee of a company, unless the alleged employer proves all following elements of the ABC test:

  • “(A) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work, and in fact.”
  • (B) That the worker performs work that is outside of the usual course of the hiring entity’s business; and
  • (C) That the worker is customarily engaged in an independently established trade, or business of the same nature as the work performed for the hiring entity.”

Exemptions to AB 5

California wants to codify the ABC test, but, it must also codify specific exemptions to it, like doctors or lawyers, engineers, accountants, nail technicians and even strippers. The Dynamex decision is pivotal because once a person is classified as an employee, additional statutory benefits are triggered that independent contractors don’t receive. One of those benefits is being covered by workers’ compensation insurance.

The Workers’ Compensation Coverage Requirement

The law in California is clear. Workers’ compensation insurance is required for all employers, even if an entity has only one part-time employee. Welcome to the gig economy where short-term contracts or freelancing is limited to a certain period of time, based on the needs of the hiring entity. The one constant in a gig economy is that gig workers have no permanent jobs. They don’t have much bargaining power either.

The Uber Driver Class Action

A large group of Uber drivers spent about six years in court alleging that they were misclassified. Control is a central element in any state when determining whether a person is an employee or independent contractor. Their contention is that Uber drivers should be

Man with black smartphone with “Uber” on the screen; image by Austin Distel, via
Man with black smartphone with “Uber” on the screen; image by Austin Distel, via

determined to be employees, given Uber’s strict rules on their vehicles and their conditions, what rides they’re permitted to take and even which roads they can use. Uber’s position is that given the fact that the drivers use their own cars and set their own schedules, they are independent contractors. The largest case was a class action against Uber. More than 13,000 Uber drivers in it recently settled. Those drivers agreed to remain independent contractors. About 350 other drivers in that class action didn’t settle. They’ve signed off on arbitration agreements, and they’ve been ordered to comply with those agreements.

Any right that Dynamex workers might have had in the context of workers’ compensation benefits weren’t part of the case. Its scope was limited to minimum wage laws and overtime pay, and only three other states use the ABC test. The likelihood of AB 5 of passing is high. The company is lobbying hard either against the bill in its entirety or to be exempted from it. AB 5 is presently being considered in the senate before being voted on there. California workers’ compensation lawyers are already licking their chops. Sacramento Workers’ Compensation Attorney Alice Strombom says it best: “If Uber and Lyft are eventually forced to classify their drivers as employees, their drivers will receive unemployment benefits, social security, minimum wage, overtime, sick leave, and workers’ compensation insurance.”

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