A blow against "bogus self-employment" and gig economy

A new pro-labor law in California closes worker misclassification loophole and inspires labor advocates around the world.

Workers in California recently received a major boost with the passage of a landmark labor law. The state of California passed Assembly Bill 5 (abbreviated AB5), that requires most companies, including app-based companies like Uber and Lyft, to treat “independent contract” workers as employees. Labor experts are predicting that this new legislation, which will go into effect Jan. 1, 2020, will reshape the gig economy as well as many other industries. It will close a regulatory loophole that allowed employers to misclassify regular employees as freelancing contractors. The new law will affect an estimated 2 million independent contractors in California, out of an overall labor force of nearly 20 million, who have been on the negative end of a decades-long trend of outsourcing and stagnant wages.

Germany should take note, considering its history of "bogus self-employment"

The law was passed amid concerns that the nature of work has become too insecure. Freelancing contractors in the US are not protected by most workplace laws, have no health care or social security benefits, are not guaranteed a minimum wage or overtime pay, and are forbidden from organizing or joining a labor union. Germany should take note, considering its history of "bogus self-employment" which the Institute for Employment Research (IAB) estimates has resulted in 235.000 to 436.000 working people being misclassified as “solo self-employed” freelancers who lack basic labor protections and social security benefits from the businesses that hire them.

Rampant misclassification

The legal landscape in the US over misclassification is complicated. There is no one set of nationwide rules that establish if a worker is an employee or independent contractor. Instead, different levels of government and agencies use varying rules, resulting in confusion, inconsistency, and legal loopholes that lead to misclassification.

At the federal level, different agencies like the National Labor Relations Board and the Department of Labor provide guidance, while in the states offices like the ones for workers’ compensation and wage boards have their own rules. Different tests are used by all these agencies, including a 20-factor test previously used by the federal tax agency the Internal Revenue Service that is still used in some states, and a 3-factor test, referred to as an “ABC” test, that is often used by a number of states to determine unemployment insurance eligibility. Adding to the confusion, one worker’s arrangement can be subject to different tests across state and federal agencies; indeed, a court might rule that a worker is an employee under one test, but an independent contractor under another.

Into this chaos stepped the California state supreme court. In 2005, a delivery driver for the company Dynamex filed a complaint that he and others had been misclassified as independent contractors, which eventually became a class action case, Dynamex Operations West Inc. v. Superior Court. In its decision in May 2018, the court applied a three-pronged “ABC” test for the first time ever in California, ruling that the delivery drivers had been misclassified. Under the test laid out in the Dynamex decision, workers are assumed to be employees unless companies can prove that their workers are legally independent contractors according to three criteria:

  • The worker must be free from the company’s control and direction;
  • The worker must perform work outside the usual course of business of the company; and
  • The worker must be engaged in an independently established trade or business.

The Dynamex decision established an important legal precedent in California (though not in the rest of the US), but it did not have much impact. Workers who felt they had been misclassified still had to file a lawsuit, which is a costly and lengthy process.

The onus is now on the employers to prove that their workers are not employees

So the goal of AB5 was to codify the ABC test used in the Dynamex case into state law. It won strong backing from California’s labor unions and the Democratic Party establishment, including the newly elected governor Gavin Newsom. Companies will now have to show that any workers they wish to classify as independent contractors meet each of the three criteria. The onus is now on the employers to prove that their workers are not employees, instead of on the workers having to prove that they are.

Most of the debate about the law has focused on rideshare and online platform workers. But most of the estimated 2 million independent contractors in California work in construction and service occupations. The new law includes some exemptions for a range of occupations, including doctors, lawyers, architects, engineers, cosmetologists, real estate agents, dog groomers and more. These are occupations that typically set their own rates and communicate directly with their customers. Uber, Lyft and Postmates led a vigorous, well-funded lobbying effort to push for an exemption of their own, but their intimidation tactics failed. Now that AB5 has been signed by the governor into law, these gig companies have filed a ballot measure that seeks to ask California voters to overturn the legislature and exempt their drivers. But they will have to collect a million signatures from registered voters to qualify their measure, so are planning to spend $90 million to pay signature-gatherers and mount a campaign for its passage. But Assemblywoman Lorena Gonzalez, the California Democrat who was the legislative sponsor of AB 5, condemned the companies. “Billionaires who say they can’t pay minimum wages to their workers say they will spend tens of millions to avoid labor laws,” she wrote on Twitter. “Just pay your damn workers!”

Uber: a transportation or technology company?

With the ABC test about to go into effect in California, a number of companies and occupations are beginning to come to grips with what it might mean for their industry. After fighting so hard to stop the law, Uber now argues the opposite: that the law does not apply to its drivers. The ride-hailing company is dusting off an old legal argument: that it’s a technology platform “operating a marketplace,” merely connecting a passenger to a driver, so it is not a transportation company and its driver are not central to its business. “Drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces,” including restaurant-meal delivery and freight trucking in addition to a taxi service, says Tony West, the company’s chief legal officer.

The law could be an existential death blow against Uber

This “tech company” argument has been rejected by a UK court and by the European Court of Justice, and most legal experts in the US see this as a desperate attempt by Uber to buy some time. Uber drivers are obviously an essential part of the company's business; indeed, without it's drivers, Uber has no business. And there will certainly be vigorous enforcement, since AB 5 includes a provision that gives California’s attorney general and city attorneys the ability to prosecute companies and block their operations if they misclassify employees as independent contractors. If Uber resists treating its drivers as employees, it will quickly find itself embroiled in numerous lawsuits filed by city attorneys in every major California city.

With Uber’s annual losses in the billions of dollars, some are predicting this law could be an existential death blow against the company. And automated robo cars will not save them, since the most credible experts now say it will take 15 years at least before Level 5 self-driving will be on city streets. So most observers agree that Uber is in for a rude shock, come January 1. Its shares already have plummeted nearly 40% from its initial public offering in May.

Other occupations such as freelance writers, mental health therapists and more are waiting anxiously to see if the new law helps or hurts them when it is implemented on January 1. For example, the law says that a media outlet is allowed to pay for a maximum of 35 articles from a freelance writer before it must hire that writer as a regular employee. A number of writers have voiced concern that this will result in less work for them. But labor reporter Margot Roosevelt tweeted that the Los Angeles Times has already hired 30 former freelancers as full-time reporters. “Those folks now have steady employment & job protections,” she said.

Aaron Colby, a labor lawyer and partner at Davis Wright in Los Angeles, says the law contains a number of ambiguities. For example, the law does not state what happens if a freelance writer publishes more than 35 articles with a single publisher– does just the 36th fall under AB 5, or do all 36 articles (35 of them retroactively). "The courts are going to have to figure that out," Colby says.

The law may be just the beginning.

California’s new law may be just the beginning. Leaders in other states are viewing it as a potential model for reversing the wage stagnation of past decades and pushing back against the labor practices of tech giants. AB5 got the attention of New York Governor Andrew Cuomo, who said, “I don't want to lag California in anything … more people should be considered employees, because what has been happening is companies have been going out of their way to hire independent contractors to get out of those obligations.” At the federal level, no legislation will move forward anytime soon, with the Republicans in control of the Senate and the very anti-labor Donald Trump occupying the White House. But Democratic Party presidential front runners Elizabeth Warren and Bernie Sanders both strongly endorsed AB 5, so the federal ground could shift in the future.

 California’s AB 5 received a great deal of media attention, not only in the US but also in other parts of the world. It shone a badly needed spotlight on workers’ rights and misclassification. Labor advocates and NGO’s all over the world were watching. Ruwan Subasinghe, legal director for the International Transport Workers’ Federation based in London, tweeted “Global unions are carefully following the passage of #AB5...We want an international governance framework for #gigeconomy workers that can help put an end to the scourge of misclassification. #California can be a source of inspiration.” Labor movements and trade unions have not had a lot to cheer about in recent years, so advocates are hoping that AB5 has blown some new wind into the sails of progressive labor politics.

Bogus self-employment in Germany

Germany also has long been plagued by misclassification, going back to the Hartz IV reforms of the Schröder years. Those reforms, which were enacted when Germany was suffering from unemployment rates as high as 11 percent – the highest since the Nazis were in power – greatly expanded the number of “Ich-AG” solo self-employed mini-businesses. But that just delayed the hard task of figuring out how to create not only an adequate number of jobs but also good quality jobs. Various investigations in Germany have found rampant misclassification abuse, with businesses treating many types of workers as self-employed in order to avoid paying social security contributions. This “bogus self-employment” loophole allows these employers to wiggle out of legal obligations and robs many workers of their rights.

About 10% of German workers are classified as „self-employed“, and many German leaders I have spoken to downplay the impact, saying solo self-employed workers do not make up enough of the overall German labor force to worry about. But the consequences for the economy extends well beyond the sheer numbers. Their presence can undermine the status of regularly employed workers by reducing the labor force‘s stability and leverage with businesses. For example, as I previously reported for Mitbestimmungsportal, Uber has continued to operate in Germany, even after a court seemingly shut it down. Just take a look on an Uber app in Berlin, Munich, Frankfurt, Düsseldorf and Hamburg, and you will see a dozen Uber drivers lurking around the immediate vicinity. This rule-breaking company has found a loophole by using drivers who are registered as private-hire autos, and spending whatever it takes to offer discounts to passengers and squeezing out the little guy taxi drivers. 

workers should be covered by a supportive portable safety net

“Good jobs for all” is a goal worth fighting for. Besides classifying solo self-employed workers as employees, Germany and the EU should make it a policy directive that every worker must be covered by a supportive portable safety net with employer contributions. As I proposed in my book Die Start-up-Illusion: Wie die Internet-Ökonomie unseren Sozialstaat ruiniert, Germany could expand its Künstlersozialkasse (KSK) program, originally established for artists, musicians and journalists, to create a universal portable safety net that encompasses other occupations of solo self-employed workers. This would be a good foundation for a system of “KSK for all.” Germany has recognized the value of having such a program for certain types of workers, so why not do it for all workers? What rationale justifies having so many categories of unequal workers and poor jobs?

Ending worker misclassification and creating a universal safety net will become increasingly important as the digital technologies spread throughout the economy, rendering even more good jobs into crummy, online-based precarity. German government, businesses and labor unions should adjust to these new realities by working together to close the bogus self-employment loophole and forge a modern social contract where there are no bad jobs, only decent ones, for all workers, occupations and industries.