Tech & Sourcing @ Morgan Lewis


Companies that use app-based technology platforms to connect consumers directly with service providers have faced an important question of whether the individuals providing the services are contractors or employees. California recently passed legislation that requires companies to treat contract workers that perform core company functions as employees.

The Growing ‘Gig Economy?’

The “gig economy” is a labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs. It comprises independent workers who are paid for providing a service by the task or job as opposed to being paid a salary or hourly wage. Technology platform companies are a major driver in the increase in the “gig economy” by facilitating transactions between consumers and the individual service providers.

The “gig economy” continues to grow as consumers increasingly rely on smartphone technology and associated apps in purchasing services and goods. Intuit and Emergent Research predicts that the number of people working on-demand (gig) jobs will grow to 9.2 million by 2021.

As more and more Americans begin to work in the “gig economy,” the stakes have been raised on technology companies that provide these platforms as to whether the individuals that are providing the services are deemed to be employees.

California Assembly Bill 5

On September 10, the California Senate passed Assembly Bill 5, which will likely have major ramifications on companies that rely on app-based technology to provide customers with on-demand services such as ride sharing or delivery. The bill aims to codify a ruling last year from the California Supreme Court. In its opinion the California Supreme Court applied a new test to determine whether a worker is an employee or an independent contractor.

Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018) involved the classification of delivery drivers for purposes of California's Industrial Welfare Commission (IWC) Wage Orders. Drivers for Dynamex alleged that they had been misclassified as independent contractors instead of employees. The court adopted a standard that presumes workers are employees instead of contractors if they perform a core function for a business and shifted the burden onto companies that attempt to classify individuals as independent contractors. Under the new “ABC test,” a worker is an independent contractor only if a company establishes 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;
  • performs work that is outside the usual course of the hiring entity’s business; and
  • is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Assembly Bill 5 states that “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.”

The impact of Assembly Bill 5 is expected to be significant as it will fundamentally change the business model of companies that have typically treated gig workers as independent contractors. A shift from classification as an independent contractor to an employee will allow for millions of workers to qualify for protections under the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act. Additionally, employees are guaranteed other rights such as minimum wage, overtime pay, or unemployment insurance. This change in designation and the accompanying protections and guarantees will come at an enormous expense to businesses that have previously relied on independent contractors to deliver services.

California’s actions will almost certainly influence other states. Similar legislation is being considered in New York, and bills in Oregon and Washington State that had previously failed could be revisited on the heels of Assembly Bill 5’s passage.