Legislature Passes Landmark Bill to Regulate Gig Economy and Boost Worker Protections

This post has been updated.

A landmark bill, which would offer new wage and benefit protections to workers in California's gig economy and a host of other industries, is headed to the governor's desk.

Assembly Bill 5 sailed through the state Assembly on Wednesday by a vote of 56-15, just over 12 hours after its late-night approval in the Senate, a major victory for labor advocates and a stinging defeat for the tech companies that staunchly opposed it.

Democratic Gov. Gavin Newsom, who was initially on the fence, endorsed the bill earlier this month and has committed to signing it.

AB 5 could impact upward of a million workers in a wide swath of industries beyond just the gig economy, from general contractors to truck drivers to strippers.

Under a 2018 state Supreme Court decision, workers who perform core functions of a business must be classified as employees and not contractors. The decision established a simple three-part criteria, known as the ABC test, to determine a worker's employment status.

AB 5, which would go into effect Jan. 1, codifies that decision. Labor advocates say that even though the Dynamex decision is already law, many companies have been flouting it. The measure would ensure that workers would not have to file suit on a case-by-case basis to seek enforcement.

"There’s a whole bunch of things that they’re currently being cheated out of, frankly," said Steve Smith with the California Labor Federation. "With respect to Uber and Lyft, it’s the exploitation they subject their workers to on a daily basis. Many of these workers are not receiving minimum wage. They are misclassified as contractors when they actually should be considered employees, meaning there’s a whole host of benefits they’re not getting that they should get like everyone else."

In steering more workers to employee status, the bill would force companies to offer basic worker protections that contractors don't currently receive, such as guaranteed minimum wage, overtime pay, contributions to Social Security and Medicare, and unemployment and disability insurance. Those workers would also be eligible for workers’ compensation and sick and family leave and would be protected from discrimination at work, none of which are currently afforded to contractors.

"It’s a really important bill. States all over the country are watching to see what happens," said Veena Dubal, a UC Hastings employment law professor, who spent several years representing San Francisco taxi drivers. "It’s pretty clear that most workers in the gig economy need labor and employment law protections under California law. ... It's vital that we have legal analysis that is clear both to businesses and workers so there's less ambiguity."

State Sen. María Elena Durazo, D-Los Angeles, said that for too long companies like Uber and Lyft have skirted labor laws and taken advantage of workers.

“These so-called gig companies present themselves as the innovative future of tomorrow," she said. "A future where companies don’t pay Social Security or Medicare, workers' compensation or unemployment insurance.”

Business advocates and other opponents of the measure warn that it will dramatically increase labor costs in California and push companies to move elsewhere, with dire consequences for the state’s economy. Many critics, including some workers whose employment status would change, also say it would take away the desired flexibility that being classified as an independent contractor offers.

"We have a completely different economy," said Jennifer Barrera, executive vice president of the California Chamber of Commerce. "We have a huge group of individuals who really value their flexibility and control over their own schedule, and I don’t think it has to be one or the other."

It's a sentiment echoed by state Sen. Shannon Grove, R-Bakersfield, who said many people prefer the freedom that contract work gives them. She also criticized the measure for penalizing some industries but leaving others out.

"This Legislature should not be in the business of picking favorites, which is exactly what this legislation does," she said on Tuesday night, following the rejection of 12 sets of Republican-sponsored amendments that would have added carve-outs for additional professions.

Newspaper delivery drivers, many of whom are currently classified as independent contractors, would also be impacted by the legislation, although as part of a last-minute Senate compromise Tuesday evening, implementation for them will be delayed for a year.

Tech companies in particular have been left out of the exemptions, despite heavy lobbying efforts late in the session to gain a carve-out. Uber, Lyft and DoorDash have subsequently begun to fund a potential initiative for the 2020 ballot that would create a third classification for their workers.

In a news conference on Wednesday, Tony West, Uber's chief legal officer, said the company doesn't consider drivers, who are independent contractors, to be a core part of its business model, and would continue pushing for a better compromise. The company serves "as a technology platform for several different types of digital marketplaces," he said, adding that it is "no stranger to legal battles."

"Today, drivers have control over when, where and how they work. They can choose to work for any of our competitors at the same time, and many do," West said. "This would all change dramatically if they were employees. We will continue to defend the innovation that makes that kind of choice, flexibility, and independence a reality for over 200,000 drivers in California."

The state estimates it loses at least $7 billion a year in payroll tax revenue due to worker misclassification — money that could be supporting schools, roads and other public services. And by avoiding unemployment insurance taxes and workers’ compensation premiums, businesses shift the burden to the state when workers get laid off, sick or injured on the job.

"These billion-dollar companies can complain, but we have to ask ourselves as taxpayers: Should we subsidize their business by subsidizing their workers?" said Democratic Assemblywoman Lorena Gonzalez, a former labor organizer from San Diego who introduced the bill.

Gonzalez dismisses the idea, often touted by opponents, that Uber and Lyft will flee California if forced to reclassify their workers as employees. More likely, she predicts, these companies will make the changes required by law because there’s a massive market for transporting individuals and goods in California, the fifth-largest economy in the world.

And if they can’t swing it, she added, then someone else will.

Additional reporting contributed by CalMatters' Judy Lin and KQED's Matthew Green.