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How Will AB5, California’s Gig Economy Legislation Impact Us as Delivery Contractors?

Quick Reference: Tax and PPP help.

AB5, California's Gig Economy Legislation, could completely change the landscape for delivery contractors in California, with a possible ripple effect nationwide. The legislation has already passed the State Assembly and is expected to pass into law.

If signed into law in its current state, most gig economy workers would be classified as employees in the state of California. This could have major repercussions across the country, as most of the major delivery companies are based in California.

That's where, if I'm at a company right now, where you need to be in a wait-and-see position because we don't really know what things are going to look like.

Richard Meneghello, Partner focused on Gig Economy at Fisher & Phillips
Picture of California state Flag

The legislation is based on last year's California Supreme Court Dynamex decision, defining more who could be classified as an employee. It establishes an ABC test, in which a position needs to meet all three of the following tests to qualify as an independent contractor:

  1. The worker is free of control from the employer (both in contract an in action) – the employer cannot control schedule or method of doing the work.
  2. The worker is doing work that is outside of the employer's usual business.
  3. The work being done involves work normally performed by a business or established trade

How is this different from past interpretations?

There are a couple of things that are significant about the ABC test that are very different than past interpretations.

Much of the Federal government uses a ten point test, where they weigh each of the factors. The use of this test is subjective and a company can cross the line in some areas but if those areas do not outweigh other factors as in the case of the National Labor Relations Board decision on Uber earlier this year, they can still rule that a worker is an independent contractor.

The California legislation narrows the decision down to three specific tests, and every single test must be met for a worker to be qualified as an independent contractor.

How would these tests impact the delivery industry?

I can imagine that if this becomes law in California, the delivery companies would insist that they meet all three laws and that it ultimately would come down to a court challenge. Keep in mind that this is only California law, this legislation does not have any jurisdiction outside of the state. However, with many Gig companies headquartered in California, if California does force them to classify delivery workers as drivers, those companies may make the decision themselves on a nationwide basis.

Do the delivery companies meet these tests?

Do delivery companies control your work? This is the one area where they are most likely to meet the test. In the National Labor Relations Board decision on Uber, the freedom provided that Uber allowed their drivers in when and where to work was significant enough that the lack of company control was considered to outweigh what they considered more minor violations. I wrote here that from my observations, Uber was very careful not to cross the lines. In contract, none of the companies really exert control. I would say that of the companies I know the most about, Grubhub is the most at risk due to recent efforts at cracking down on cherry picking. While their contract does not allow for company control, their practice could be demonstrated to do otherwise, and the timing of their actions could work against them.

Are delivery workers performing work that is different than the company that contracts them? This is going to be the tough one for most of these companies. They claim that they are not actually delivery companies, but software companies. In the truest form of gig economy work, you could make a case that all they are doing is connecting diners with contractors to make the delivery. However, the very fact that the fees paid to the drivers are not tied to the delivery fees paid by the restaurants will make this one a difficult test to prove. Grubhub may have the best opportunity here, as my understanding is they were initially not interested in providing delivery, that their model was to provide lead generation for restaurants and that they provided delivery services as a means for restaurants to ramp up to where they could do their own delivery. However, recent national contracts with chains that have no intention of ever providing delivery or even with pizza places that already have their own delivery service might work against them here. This section would all boil down to whether or not the courts can be convinced that these delivery companies are not actually delivery companies.

Are delivery contractors in their own business in an area where that's normally what people do? This test comes from the idea of what the original idea of a contractor was. If you are a sales company and needed an accountant to look over your books, well, that makes sense that the accountant would be a contractor and not an employee. Where the abuse started happening was when computer programmers were hired by companies who traditionally hired programmers as employees, but were now being called contractors. In fact, the tech industry will probably have greater repercussions from this law than the gig economy. This one is a grey area, it can be argued that there have always been delivery companies, however the fact that most drivers who sign on had no intention of doing so as a business or had never been in business before could make a difference.

What would delivery work look like in California if drivers are classified as Employees?

California is probably the last state that the delivery companies would want to rule as an employee. According to this chart from the Department of Labor, minimum wage is $12 per hour in California and tips cannot go against that wage. California employers are also required to fully reimburse vehicle expenses. There is some leeway, and it is possible that reimbursement can be for a set amount per mile that is different than the IRS standard (currently 58.5 cents per mile), however if someone can document that their actual expenses are more than what is being reimbursed, they have the right to demand that reimbursement.

So what this means is that as an employee, a driver would receive $12 at minimum, plus tips, plus reimbursement for miles and possibly for cell phone (though I would imagine that companies would provide cell phones instead). That seems like a pretty sweet deal compared to what most drivers are getting now. Employers have to pay half of your social security (which is why our self employment taxes are so high, we have to pay both halves) and provide worker's comp, unemployment insurance, sick leave, and more than likely benefits like health insurance.

The expense could be so great that companies could just determine that it's not profitable and shut down operations in California.

If they do continue to go forward you can expect a few changes. Full time work will probably go away, you can almost guarantee that you won't see more than 40 hours a week. Companies will be able to tell you when and where to work, you will have to accept all orders, and you will lose the freedoms you have come to expect. For many, that's probably not a bad tradeoff.

There could be good and bad from the customer viewpoint. You can expect efficient dispatching to become a priority now that companies have to pay for time and mileage. The twenty mile offers will probably dry up. Companies may shorten the distance radius from a restuarant or charge more for longer distance deliveries. You can expect a lot more stacked orders which may mean deliveries will take longer.

How will this impact other states?

Other states all have their own definitions of what makes an employee. The California decision could lead to similar legislation in other states. Or if it impacts the California economy enough, it could be enough to discourage other states from doing the same thing. Some states are more business friendly and less likely to enact legislation. They may or may not adopt a similar ABC test.

Maybe the greater impact would be in how the companies themselves are affected by this legislation. California provides a significant chunk of the market for most of these companies. If they choose to shut down in California, could that be enough to make them shut down period? If they stay in business in California with employees, and adjust their infrastructure to allow employees, and adopt more efficient dispatching, it could lead them to making the switch to an employee model nationwide.

How Should we Respond?

I would offer two major pieces of advice:

Watch and See

Have an Exit Plan!

I think one thing that most people talking about this legislation leave out is that, everything isn't set in stone yet. Richard Meneghello, a partner at Fisher and Phillips who focuses on the gig economy, stated in this article “Don't expect the Senate to pass it as it currently sits … there might be some more exemptions that are built in.” There is a negotiation period before the Senate would vote. There are exemptions built into the legislation for certain trade areas, and there is a possibility that some gig economy work could be included in the exemptions before it's all said and done. Meneghello went on to say “That's where if I'm at a company right now, where you need to be in a wait and see position because we don't really know what things are going to look like.” Maybe the biggest take away from what he had to say that I see is “it's still early for any major changes to business models.”

If there are any changes, it will take time. We'll know more if and when the final product is passed and signed into law. Even then, I don't expect any of the companies to change immediately. They may challenge or they may be challenged, and court decisions on specific companies take time.

Having said that, I would say be ready for change. As things are right now, whether due to changes in California or other places, or whether due to lawsuits, you could see the whole model change. And the biggest thing we have to ask ourselves is, what will I do when it changes?

Do you want to continue to do this as an employee? Personally, if it goes that way, I'm out. I prefer the independent contractor relationship. That said, I think for a lot of drivers, an employee relationship would be a lot better, as they really aren't equipped to operate their own business or don't totally understand how little they might actually be making. And that's okay if that's the route they prefer to go.

I prefer the independence. I chose to do this for that reason. However, I'm not going to shed tears if companies are forced to change the classification of their drivers to employees. These companies are taking advantage of drivers by putting them into business owner positions that they aren't prepared for. And some (**cough** Grubhub **cough**) are worse than others at controlling drivers even though it's illegal to do so. So on an industry wide basis, because of the abuse of the independent contractor status, I would prefer to see it go to an employee model. If it shuts down the industry, so be it, because frankly no industry should be allowed to exist on a model that exploits people the way this one does.

For those of us who prefer the independent status, who actually thrive on owning our businesses, we have time. This should never be an end and the beauty of the gig economy is that it gives us a taste. Start thinking of where you would like to take your independence, start planning for other ways that you can grow that newfound entrepreneurial spirit. Maybe a change in this industry can be the kick in the pants we need for something bigger and better.

Could this help someone else? Please share it.

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