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On Sept. 10, 2019, California legislators passed a controversial bill that requires companies like Uber, Lyft and DoorDash to recognize independent contractors as employees. The app-based companies attempted to negotiate an exemption from the bill but failed to reach a solution with legislators. Many legislators were unwilling to negotiate – State Senator Maria Elena Durazo said, “Today the so-called gig companies present themselves as the innovative future of tomorrow, a future where companies don’t pay Social Security or Medicare. Let’s be clear: there is nothing innovative about underpaying someone for their labor.”

Assembly Bill 5

Assembly Bill 5, slated to take effect Jan. 1, 2020, was proposed by State Assemblywoman Lorena Gonzalez, and will force “gig-companies” to designate workers as employees instead of contractors if the company exerts control over how they perform their tasks or if their work is party of a company’s regular business. According to an article in The New York Times, the legislation is expected to “affect at least one million workers who have been on the receiving end of a decades-long trend of outsourcing and franchising work….” Workers who are classified as a contractor typically do not have access to basic protections like minimum wage, paid sick leave or unemployment insurance. However, under the new bill, ride-hailing drivers, food-delivery couriers, janitors, nail salon workers, construction workers and franchise owners could be reclassified as employees and would be eligible for the related benefits.

The new bill codifies, what the California Supreme Court named, the “ABC Test.” An article for Mondaq explains that the bill originates from a case called Dynamex Operations West v. Superior Court of Los Angeles

The ABC Test restricts who may be classified as an independent contractor by creating a presumption that a worker performing services for hire is an employee unless the hiring entity can establish the worker:

  • Is free from the control and direction of the hiring entity in performing the work.
  • Performs work that is outside the usual course of the hiring entity’s business.
  • Is customarily engaged in an independently established trade, occupation or business.

What will the tax implications be?

An independent contractor for federal tax purposes must pay the entire portion of payroll taxes. This alone makes it much cheaper for companies to hire contractors. According to California’s Department of Industrial Relations, the misclassification of workers as independent contractors results in a loss of payroll tax revenue to the State, estimated at $7 billion per year. Legislators hope that the passage of Assembly Bill 5 will help close that gap.

In addition, a bill currently pending before Congress could raise a potential conflict with California Assembly Bill 5. The proposed “New Gig Act”, if enacted, would establish its own federal ABC test to determine if a worker qualifies as a contractor for tax purposes. The factors of the test include:

A.  The relationship between the parties (i.e. the provider incurs expenses; does not work exclusively for a single recipient; performs the service for a particular amount of time, to achieve a specific result, or to complete a specific task; or is a sales person compensated primarily on a commission basis).

B.  The place of business or ownership of the equipment (i.e. the provider has a principal place of business, does not work primarily at the recipient’s place of business, and provides tools or supplies).

C.  The performance of the services under a written contract that meets certain requirements (i.e., specifies that the provider is not an employee, the recipient will satisfy withholding and reporting requirements, and that the provider is responsible for taxes on the compensation).

The federal bill would also set forth withholding requirements for service recipients who meet the requirements of the test and would allow service providers to petition the U.S. Tax Court for a determination of employment status.

What happens next?

From the perspective of gig economy companies such as Uber and Lyft, the U.S. Department of Labor estimates that requiring such companies to classify their workers as employees could raise their overall labor costs by 20 to 30 percent. It is perhaps no surprise, then, that these gig-economy companies are staunchly opposed to Assembly Bill 5.

Despite passage of the bill, Uber, Lyft, and DoorDash have collectively pledged $90 million to fight the legislation. The New York Times reported that Uber will continue to press lawmakers to consider a separate bill that would exempt similar gig-based companies from Assembly Bill 5’s impact. The companies have stated that the bill will make it more difficult for workers to keep flexible schedules and will threaten the workers’ ability to work when and where they want.

Although not everyone is on board with California’s new bill, other states including New York, are gearing up to fight a similar battle. Bloomberg Law reports that Sen. Diane Savino has plans to introduce new legislation that would extend protections such as unemployment insurance, workers’ compensation benefits, and minimum wage and overtime pay requirements to a new class of “dependent workers.” The New York legislation comes from widespread pushback against gig-companies’ business models. Even New York Gov. Andrew M. Cuomo supports efforts similar to those of California, stating that “more people should be considered employees because what has been happening is companies have been going out of their way to hire independent contractors to get out of those obligations.”

The push for reclassification is not new and has seen support in prior years, including a federal bill introduced by former Obama Labor Department official Seth Harris and Princeton University economist Alan Krueger and employee status recognition in narrow circumstances by states such as New York, Alaska and Oregon. However, California’s new bill may have reignited a nationwide spark to reclassify contractors as employees.

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