Hollywood, CA (WorkersCompensation.com) – A California law aimed at protecting gig workers at companies like Uber and Lyft may backfire on Hollywood if ‘independent contractors’ must be classified as employees, industry experts say.
The new legislation, AB 5, is designed to protect workers from being misclassified as independent contractors in order for companies to reduce benefit costs. When a company hires an independent contractor, the company is not responsible for providing coverages like workers’ compensation or unemployment benefits. The law, however, exempts a few professions, like doctors, insurance agents, securities brokers, and direct sellers.
“Existing law, as established in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), creates a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits arising under wage orders issued by the Industrial Welfare Commission. Existing law requires a 3-part test, commonly known as the ‘ABC’ test, to establish that a worker is an independent contractor for those purposes,” the bill says. “This bill would state the intent of the Legislature to codify the decision in the Dynamex case and clarify its application. The bill would provide that the factors of the ‘ABC’ test be applied in order to determine the status of a worker as an employee or independent contractor for all provisions of the Labor Code and the Unemployment Insurance Code, unless another definition or specification of ‘employee’ is provided.”
Under the ABC test, a worker is considered an employee unless the employer can prove that the person isn’t because she is a) not under the employer’s supervision; b) doing other work outside of the employer’s business and c) the worker is “in an independently established trade, occupation or business of the same nature” as the work they do for the employer that is hiring them.
“The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order,” the court said in its brief in May 2018.
But part of the law as written establishes that the independent contractor must perform duties outside the usual course of the company’s business, and that has Hollywood worried, experts say.
“That test will necessarily lock talent out of being an independent contractor if it passes in its current form,” Rick Genow, talent lawyer for clients like Debra Messing and Anthony Anderson, told the Hollywood Reporter. “The economic impact would be somewhat devastating to both talent and the studios.”
Typically, talent in Hollywood, like actors who make more than $100,000 per year, form their own corporations. Then, the corporations loan the actors to movie studios for their services, instead of studios hiring actors on as employees. Under the new law, industry experts fear, studios would treat everyone as employees and the loan-out model goes away. That scenario would be especially difficult for studios since President Donald Trump’s 2017 tax cuts eliminated business deductions for employees.
“It would be catastrophic to our business if loan-outs went away,” Harley Neuman, business manager for celebrities like Ellen Degeneres and Scarlett Johansson says, according to the Hollywood Reporter. “It would be a double whammy to lose the employee business deduction, and lose the ability to use a loan-out.”
While in many instances it is the worker who wants to be classified as an employee for worker protections, in Hollywood, many times it is the talent and their representatives who want to be classified as independent contractors.
“In reality, in many of those situations it is the talent and its reps who are pushing for the status,” says entertainment attorney Ivy Kagan Bierman to Vox. “On numerous occasions, I’ve had a client call me to say ‘we’re getting a lot of pressure to classify this person as an independent contractor.”
Studios, she says, would rather classify actors as employees, even if it’s only for one day.
The result, said economist Chris Thornberg of Beacon Economics, is that the industry may shift away from California, or find other ways to cut costs.
“For the industry to shake out, ultimately people are going to get more in the way of benefits, more in the way of comfort, and less in the way of take-home pay,” he says.
In the meantime, companies like Uber and Lyft are working to turn public opinion against the bill. In recent weeks, the companies have published op-eds in state newspapers, to enlist the support of drivers to help sway upcoming votes on the bill.
For rideshare companies and sharing economy companies in Silicon Valley, what’s at stake is the foundation of their profit model. The status change would mean Uber and Lyft’s drivers in California would become employees and the company would be required to pay hourly wage minimums, as well as unemployment and workers’ compensation premiums, paid parental leave, overtime pay and health care subsidies.
Both companies have been lobbying against the bill and working to provide a form of benefits for their contractors. In exchange for allowing them to continue classifying their drivers as contractors, they have promised to set minimum pay rates for drivers and create a company-paid benefits fund.
But, the bill would also rewrite the rules for industries like adult entertainment – including exotic dancers, cosmetology and business-to-business contractors.
Chamber of Commerce
Because of the wide-ranging implications on more than just the gig economy, the California Chamber of Commerce says it supports the bill, but only if amended.
“This new (ABC) test places in doubt the sustainability of a significant portion of independent contractor relationships in California and has the potential to cause substantial economic harm to millions of California citizens,” the Chamber wrote to assemblymen. “Because of the rigidity of the test, specifically factors “B” and “C”, most individuals who control their own schedule control the projects or tasks that they take on, and control the way in which they perform the tasks or projects, will likely lose existing contracts and work opportunities because they perform work that is similar to that of the business entity retaining their services and/or are not in an independent business or trade of the same work being performed. With one judicial opinion, nearly 30 years of established law has been overturned virtually overnight (and possibly retroactively as well).”
The Chamber and other business groups say the legislation is flawed because the Supreme Court’s decision was based on outdated information.
“The Industrial Welfare Commission, which was empowered to promulgate and amend the Wage Orders, including the Wage Order at issue in Dynamex, was defunded over 15 years ago,” the Chamber says in its letter. “This means that, when the Wage Orders were finalized, the use of technology, platforms, and the flexible work arrangements that now exist in California’s economy were never considered. This decision from the Supreme Court takes California backwards into ideas about employment that have no relation to the modern workforce and that have never been contemplated by elected officials or agencies.”
AB 5 was passed by the California State Assembly on May 29, and is now headed to the state Senate, with expectations it will be on Gov. Gavin Newsome’s desk for signature by the end of summer.