California law could soon redefine a large swath of independent contractors as employees, upending the business models used by the state’s gig economy companies—including Uber and Lyft.

Drivers for ride-hailing companies are connected to their customers through an app, allowing users to request on-demand rides and drivers to accept those requests whenever and wherever they want.

Since their inception, the drivers have been considered independent contractors, meaning they get paid for each “gig” they accept, but are not covered by any of the other benefits those classified as employees are required to get under current state law. These include sick time, medical coverage, and overtime.

The state Senate is expected to pass Assembly Bill 5 next week after it was approved by the Assembly in May, changing the status of these workers to employees of the companies that hired them. 

Lobbying interests from all sides have descended upon Sacramento as negotiations over the final bill continue. Gov. Gavin Newsom has indicated he will sign AB5 into law.

The rideshare companies maintain the majority of their workers have full-time jobs elsewhere that provide these benefits, and prefer the flexibility for making an extra buck.

Jeff Perry, a driver in Sacramento, disagrees. He says the companies are painting an inaccurate picture regarding the number of drivers who don’t need or want benefits.

“Like, I don’t deserve a fair wage because another guy pays me a fair wage and then in my time off [Uber or Lyft] should be able to cheat me or something,” Perry said. “I don’t understand that.”

A recent Uber gig Perry accepted at Sacramento International Airport took more than two hours and only earned him $12.14 from the company. That’s because a lot of Perry’s time was eaten up waiting to be hailed by a passenger in the first place. He also says the amount he used to make per trip has dropped by more than 50 percent since as Uber has altered its formulas for paying drivers. 

“I can’t just sign on for an hour and go make money,” Perry said. “This is not possible. Any driver who’s been doing this for a while, knows that.”

Perry is hoping AB5 will help change his situation.

The legislation is fallout from a recent California Supreme Court decision that sided with independent contractors who worked at a courier company called Dynamex. It said, based on a three-part, ABC test, the workers should have been considered employees of Dynamex.

Los Angeles attorney Timothy Kim contends that of the three parts created by the Dynamex decision, the ‘B’ test is the big one.

Kim works for Shepherd and Mullin, a firm that represents gig economy companies. He explained that the ‘B’ test requires the person’s work to be outside the normal business activities of the hiring company. 

For example, if a pizzeria hires somebody to clean the windows, that person is performing work outside the company’s “usual course of business” and can be an independent contractor.  But, if a pizzeria hires someone to make pizzas, that argument is much harder to make, because a pizzeria’s primary business is to make and sell pizzas, according to Kim. 

Businesses throughout California, not just the gig economy players, will be affected in some way by this test.

“Almost every large company uses independent contractors to some extent,” Kim said.

Los Angeles Attorney Timothy Kim at a moot court competition at Columbia Law School in 2016. Kim represents gig economy companies and says AB-5, should it become law, would have far-reaching effects.Courtesy / Timothy Kim

Assemblywoman Lorena Gonzalez is AB5’s author. She hopes, by baking the Dynamex decision into state law, her bill will level the playing field.

“A lot of people are getting rich and it’s not the workers, and it’s at the cost of the taxpayers,” Gonzalez said during a recent committee hearing for AB5. 

While AB5 is far reaching, it also limits who will be affected by carving out professions that can remain as independent contractors, including emergency room doctors, realtors, and insurance brokers.

Other exemptions are still being negotiated, but it’s unlikely the gig companies will be among them. Instead, Uber, Lyft, and DoorDash are lobbying for a new category of worker that falls between contractor and employee, possibly bringing that issue to voters at the ballot box.

“We remain focused on reaching a deal, and are confident about bringing this issue to the voters if necessary,” said Adrian Durbin, a spokesperson for Lyft. 

If a compromise is reached in Sacramento, it would likely not be within AB5, but would be part of a separate bill. Should that attempt fail, the three companies are committing $30 million each to fund the potential ballot proposal.

“All eyes are on California right now to see how this shakes itself out,” said Jarrett Dieterle with the R Street Institute, a Libertarian think tank based in Washington, D.C.

He believes a compromise to include this new worker category, could set California apart as a nationwide model.  But as currently written, Dieterle said AB5 could cost the business sector as much as $6 billion annually.

“So, if a broad swath of California’s workforce was moved over to become employees instead of contractors, it’d have a lot of costs,” Dieterle said, based on a calculation that independent contractors cost businesses just 60 cents on the dollar compared to employees.

Correction: A previous version of this web story and our broadcast story misstated what employment benefits would be impacted by this bill. The web story has been corrected, and the audio story has been removed until we can correct it.

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