As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. 2020 was a fascinating year for independent contractor compliance. Here’s a look at five of the top stories.
1. The Evolution of AB5
In 2019, California passed Assembly Bill 5 (AB5) that enacted into law the ABC standard for determining if a worker is an employee or independent contractor. Under AB5, a worker is an employee unless the business can show that:
A. The worker is free from the direction and control 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. The worker performs work that is outside the usual course of the hiring entity’s business; and
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
AB5 took effect on January 1, 2020 amidst an outcry of complaints, criticisms, and lawsuits. Despite widespread criticism, AB5 has had a broad effect. AB5 created an exception from the ABC test for “bona fide business to business relationships” when a freelancer or independent contractor has formed a business entity and meets 12 other requirements.
In September, California passed AB2257 with a variety of amendments to AB5. AB2257 creates a number of new exceptions to the ABC test including exceptions for recording artists, songwriters, composers, record producers, musical engineers and mixers, vocalists, photographers working on recording photo shoots, radio promoters, and other individuals engaged in creating creative, marketing, or independent music publicist services.
It is important to note that AB2257 did not materially change the bona fide business-to-business exception under AB5, which is the exception that is available to independent contractors who don’t fit within the defined categories of AB5 or AB2257.
2. California Voted to Allow Uber and Lyft drivers to be Independent Contractors
In November 2020, California voters voted in favor of Proposition 22, a ballot measure that allows companies like Uber and Lyft to classify their workers as independent contractors. Despite a number of exceptions in AB5, drivers for Uber and Lyft were subject to the ABC test and classified as employees. Uber and Lyft worked to put a measure on the ballot that would allow app-based drivers to be classified as independent contractors. This measure became Proposition 22.
California voters adopted Proposition 22 and rejected the ABC test for app-based drivers.
The passage of Proposition 22 does two things. First, and most immediately, app-based drivers (such Uber and Lyft drivers) can be classified as independent contractors. Second, the passage of Proposition 22 is support for independent professionals who want to work independently. As Miles Everson, CEO of MBO, noted, “This is not just about Uber and Lyft. It’s about people who want to build their own business. … High-end knowledge workers generating six figures should be happy about the decision.” With respect to the ABC test, Miles said “It won’t go away, but it will be revisited and looked at more closely.”
3. Coronavirus Relief Packages Included Benefits for Freelancers and Independent Contractors
March 27, 2020, US Congress passed The Coronavirus Aid, Relief, and Economic Security Act, a $2 trillion economic stimulus package to provide liquidity for the American people and economy during the current pandemic.
The CARES Act contains provisions that provide benefits across all areas of the economy, including large and small businesses, individuals, state and local government, and our public systems, including healthcare and education. The $2 trillion bill is allocated to keep Americans on their feet and provide much-needed “liquidity,” or ready cash spend, in the near term.
Treasury Secretary Steve Mnuchin said the CARES Act would facilitate up to $4 trillion in financing for U.S. business by leveraged lending from the Federal Reserve, backstopped by Treasury funding, as well as by Treasury loans and loan guarantees. The CARES Act is a big part of the Treasury story, but the CARES Act on its own provides impressive further liquidity from a combination of spending, tax deferral, tax relief, and small business lending.
4. Doordash and Postmates Faced 5,000 Arbitration Claims
In Februrary 2020, both Doordash and Postmates were faced with thousands of claims from their drivers. In the District Court for the Northern District of California, Judge William Alsup ordered Doordash to arbitrate claims with 5,000 drivers. Doordash failed to pay the arbitration fees and expected the cases to be combined and litigated in court.
However, the plaintiffs’ attorneys asked the judge to compel arbitration and he agreed with them. Doordash adopted arbitration agreements as way to avoid class action lawsuits. An expected consequence of this approach is that Doordash must now pay the arbitration fees and arbitrate claims with thousands of drivers.
Postmates faced the same situation in the United States District Court in Oklahoma. Judge Saundra Brown ordered Postmates to conduct more than 5,000 individual arbitrations with drivers. The arbitration fees alone are likely to exceed $10 million.
5. Calls for New Approaches to Worker Classification
The fight between the state of California and Uber and Lyft has prompted a number of commentators to propose alternative solutions to classifying independent workers. In a New York Times editorial, Uber CEO Dara Khosrowshahi argued for a “third way” for gig workers. Khosrowshahi proposed that, “gig economy companies be required to establish benefits funds which give workers cash that they can use for the benefits they want, like health insurance or paid time off.” Khosrowshahi’s approach would blur the difference between employees and independent contractors and create more administrative work for companies who engaged with gig workers.
In Forbes, Ike Brennan argued for one national standard for classifying workers as employees or independent contractors, writing: “A national standard that clearly delineated the difference between an independent contractor and an employee, and created a safe harbor that could be easily satisfied by people who want to be considered independent contractors, would provide certainty to independent contractors and the companies that hire them. Ending the uncertainty in the contingent labor market would boost employment and economic growth at a time we desperately need both.” Brannon’s approach would make engaging independent contractors far less complicated—companies would not have to deal with the different standards and criteria in each state in which it engaged independent contractors.
MBO has put forth its own proposal for a national standard with its proposal to create a Certified Self Employed (CSE) federally recognized safe-harbor worker classification.
For more information, check out our resources page on misclassification and compliance, or contractor engagement best practices. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.