California’s Pending Independent Contractor Rehaul: How the Restaurant Industry Will Be Affected

​By Pooja S. Nair, Jessica Kraus

​The California legislature passed AB 5, a sweeping overhaul of California’s independent contractor requirements, which Governor Gavin Newsom is expected to sign into law.  The bill narrows the definition of an independent contractor, meaning that most workers will be classified as employees.  If signed, the bill will go into effect on January 1, 2020.

In April 2018, the California Supreme Court issued the landmark Dynamex ruling, in which it adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders. The court adopted the “ABC test.”  Employers may only classify a worker as an independent contractor if the hiring entity satisfies all three conditions of the test: (A) 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 the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed. 

To the extent that restaurants use independent contractors for any part of their business, ranging from the bar program to delivery services to marketing, they must carefully consider the ABC test and grapple with consequences of misclassification. 

Dynamex and the ABC test operate from a presumption that a worker hired and paid to perform labor or services is an employee for wage and benefits claims purposes. That presumption may only be overcome by the three-part ABC test.  The aftermath of Dynamex has been significant confusion, as business and independent contractors struggled to understand the reach of the ruling.  

AB 5 is intended to codify and clarify the Dynamex decision.  The bill provides that certain occupations are exempt from following the Dynamex rule, including doctors, psychologists, lawyers, architects, engineers, accountants, insurance agents, realtors, hairstylists, freelance journalists and financial brokers.  Independent contractors in these occupations would be governed by the status quo prior to Dynamex, which made it easier to establish an independent contractor relationship. While Dynamex only applied to minimum wage rules, overtime, meal and rest breaks, AB 5 extends the benefits to employees to include worker’s compensation, unemployment and disability insurance and paid family leave and sick days. 

The bill has stirred up fierce arguments on both sides.  Proponents advocate that the bill would protect workers and provide them more security and benefits while at the same time benefit the State by shifting the cost of safety-net benefits onto employers.  Opponents of the bill stressed that forcing certain industries to reclassify their workers will stifle innovation and entrepreneurship and hinder small businesses.  Additionally, the Southwest California Legislative Council argued that the ability to work as independent contractors has provided income to millions of workers and enabled some workers to contract their services to multiple businesses and thus receive multiple streams of income.

Governor Newsom has stated his intent to placate both labor unions and tech companies.  Newsom characterized AB 5 as operating within a “framework of compromise.” While the Governor is expected to sign the bill, he has indicated that he may support a proposal put forth by app-based driving companies such as Uber, Lyft and Doordash to create a special category for app-based drivers. 

Restaurants relying on app-based delivery platforms utilizing independent contractors are likely to find themselves caught up in the blowback of AB 85.  Delivery companies that use independent contractors as drivers will need to pay minimum wage and are likely to pass on increased costs to consumers. Given that delivery has been a growing percentage of business for restaurants, increased consumer costs may decrease demand for delivery.

To the extent that restaurants use independent contractors for any part of their business, ranging from the bar program to delivery services to marketing, they must carefully consider the ABC test and grapple with consequences of misclassification. 

The application of AB 5 to franchise relationships is also an open question that may affect restaurant operators.  The International Franchise Association lobbied for an exemption for franchising to be included in the bill, but one was not included.  In, May 2019, the Ninth Circuit Court of Appeals held that franchise relationships could be subject to the ABC test.  The Court found that the ABC test provide the appropriate standard for determining whether franchise workers were properly classified as independent contractors or instead were employees of a national master franchisor (as distinct from the regional franchisees with which they contracted) for purposes of state wage and hour law.  That decision was ultimately withdrawn, but there are many open questions as to whether franchisees could be swept into the scope of AB 5.

Passage of AB 5 will precipitate a longer-term fight on the issue of independent contractors.  For example, Uber has stated that it will not automatically be reclassifying its drivers as employees, even after the law goes into effect in January of next year and expects to continue to deal with claims of misclassification.  Uber, Lyft, and Doordash have announced that they will bankroll a $90 million campaign for a 2020 California ballot initiative to create an alternate classification for delivery drivers.