Further Fallout from California’s Worker Classification Law AB5:  Court Battles; Voters to Decide on Exception; Some Relief for New LLCs

By July 10, 2020July 12th, 2020COVID-19 Updates, News

California’s groundbreaking worker classification law of 2019, “AB5”, continues to reverberate throughout the state and beyond.  To recap, in 2019 the California state Legislature passed Assembly Bill 5 (AB5), which was signed into law by Governor Gavin Newsom.  AB5 mandates that employers classify all workers as “employees” (with the additional benefits and costs that go along with that) unless the employer can prove the following three things:

  1. The worker is free to perform services without the control or direction of the company;
  2. The worker is performing work tasks that are outside the usual course of the company’s business activities; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This test holds companies to a higher standard in proving that their workers are “independent contractors” (with no benefits and fewer costs to the employer) vs. employees.  AB5 requires that companies such as Uber, Lyft, and Doordash classify their “gig worker” drivers as employees, and pay them minimum wage and overtime, reimburse their expenses, and provide meal and rest breaks.  Uber, Lyft and Doordash have to date refused to reclassify their workers, and the fight over implementation of AB5 is taking place in the courts and the ballot box.

On June 24, a coalition consisting of the California Attorney General and the City Attorneys of Los Angeles, San Diego and San Francisco (“Coalition”) announced plans to file a preliminary injunction motion to require Uber and Lyft to immediately stop misclassifying their drivers as independent contractors.  The injunction follows the Coalition’s lawsuit against Uber and Lyft, which alleges that Uber’s and Lyft’s misclassification of drivers deprives workers of workplace protections.  The Coalition argues that immediate action needs to be taken, and that the companies’ misclassification harms the public by depriving the state of tax revenue and depriving their drivers of employment protections.  The Superior Court of San Francisco has set a hearing on the Coalition’s preliminary injunction for August 6.  In a press statement responding to the Coalition, Lyft stated that it believes “the courts should let the voters decide. Trying to force drivers to give up their independence 100 days before the election threatens to put a million more people out of work at the worst possible time.”

Uber and Lyft have funded a campaign for a ballot proposition (Proposition 22) in the November election, which would override AB 5 to classify ride-hail drivers as independent contractors and enact labor and wage policies, health care subsidies and occupational accident insurance for ride-hail drivers.  Proposition 22 would designate those drivers to be independent contractors, not employees, but would offer those drivers new but smaller benefits than they would have if they were actual company employees.  Specifically, under Proposition 22 drivers would be guaranteed an hourly wage — slightly above the state minimum wage — for time spent driving; a monthly health insurance stipend for some drivers, based on the hours they work per week; new medical and disability benefits if a driver is injured while driving; and new rules pertaining to rest periods, sexual harassment and criminal background checks.  In essence, Proposition 22 will let the voters of California decide whether app-based contractors like Uber, Lyft, and Doordash should receive an exception to AB5.

A more indirect result of AB5 has been seen with Limited Liability Companies (LLC) in California.  In response to AB5, an influx of freelance workers (like writers) and small businesses created LLCs in the state because they believed or were told that it was necessary to comply with AB5.  While AB5 does not address the form of an employer (e.g., LLC, Corporation, Partnership, etc.), many people thought that setting up an LLC would help them preserve their relationship with their employer, and in some cases, employers have requested that their workers create LLCs.  To set up a single-member LLC in California, you must have a name that is not already in use, file forms with the Secretary of State and pay a $70 fee.  Every LLC that is doing business or organized in California must also pay an annual tax of $800, even if the business is not active, until the LLC is canceled.  Many freelancers and small businesses set up LLCs late in 2019 – after AB5 was signed into law in September.  In response to the wave of new LLC filings at the end of 2019, the author of AB5, California Assemblywoman Lorena Gonzalez called for a one-year exemption of the $800 tax for those who formed an LLC between September 2019 and December 2020.  The law that was actually put into place – budget bill AB85 – is more generous and waives the $800 tax for LLCs, limited partnerships and limited liability partnerships that first register with the Secretary of State in 2021, 2022 or 2023.  Thus, a bit of relief for those who may have set up LLCs or partnerships in response to AB5.