Gig economy: Governments legislate to disrupt the disruptors

Lucy Trevelyan

In September, Gavin Newsom, California’s Governor, signed into law Assembly Bill 5 (AB 5), which will reclassify two million contractors as ‘employees’ under state labour laws.

California’s move has been viewed as disrupting the rise of the gig economy and other US states are likely to follow suit, as governments endeavour to implement laws to offer workers greater legal protection.

AB 5 both codifies and expands upon the California Supreme Court’s ruling in the 2018 Dynamex case. Specifically, it applies the ‘ABC test’, found in Dynamex to be an appropriate standard to determine under state wage and hour law whether a worker is an employee or a contractor. The test includes three specific conditions that a worker must meet to be classified as a contractor, rather than an employee.

Philip M Berkowitz is Co-Chair of the IBA Diversity and Equality Law Committee. The ABC test is, ‘far narrower than what has been the traditional standard for employee-independent contractor classification,’ he says ‘and will result in vastly more workers being “employees.”’

The increasing importance of the contingent workforce is placing extraordinary stress on already strained social programs which are normally funded by payroll taxes

Philip M Berkowitz
Co-Chair, IBA Diversity and Equality Law Committee

The passing into law of AB 5 follows a decision by the New York City Taxi and Limousine Commission to designate a minimum wage for drivers at ride-hailing companies, which was implemented in January 2019.

In the US, Berkowitz says, the issue of the protection of workers who provide ‘gig economy’ services is very much in turmoil. ‘There is concern that the increasing importance of the contingent workforce is placing extraordinary stress on already strained social programs which are normally funded by payroll taxes,’ says Berkowitz. ‘With federal inaction on the issues, we see various states passing laws that would attempt either to preserve or create employee status for those individuals.’

There is, however, an inherent conflict between the societal interest in protecting gig economy workers by legally classifying them as employees who deserve the protection of employee status, when many of these workers would expressly reject this status, and prefer to see themselves as independents or freelancers.

‘The concern is some of these individuals may be exploited; that they will fall into a nether land, considered neither fish nor fowl, and, by missing out on the statutory protections and benefits enjoyed by employees, may ultimately become a societal burden if their business model fails,’ says Berkowitz.

For companies, complying with laws like AB 5 may be costly and disruptive. Indeed, on 29 August, ridesharing company Uber published a blog post in which it noted that ‘making all drivers full-time employees… [would] effectively require us to do something that is both unrealistic and never been done before: on-demand employment.’ Uber further explained that it had proposed a compromise framework to California lawmakers and other stakeholders, prior to AB 5 being signed into law.

‘Companies will need to determine whether they must reclassify workers as employees and determine the cost of doing so,’ explains Berkowitz. ‘These costs may include hourly rates, benefits, and increased payroll costs for workers’ compensation and unemployment insurance.’

In the United Kingdom, the government has signalled its intent – via its December 2018 policy paper, the Good Work Plan – to legislate to clarify employment status tests. Proposals include providing workers with a right to reasonable notice of work schedules and compensation for shifts cancelled without reasonable notice.

A Watford employment tribunal has meanwhile asked the Court of Justice of the European Union (CJEU) to clarify whether a contractual right to substitute means an individual cannot be classed as a ‘worker’. The case, B v Yodel Delivery Network, has been brought by a Yodel courier under the Working Time Regulations.

Rather than UK law keeping pace with the emergence of the gig economy, the gig economy has in fact been conceived and thrived in regulatory gaps, says Claire Scott, a legal director at Pinsent Masons. ‘However, there is an increasing judicial recognition that those engaged in the gig economy may be workers with associated rights, such as those under working time and national minimum wage legislation.’

Indeed, in the 2018 Pimlico Plumbers case, the UK Supreme Court unanimously ruled that engineer Gary Smith was indeed a worker and not self-employed. ‘This decision was specific to the facts of the case and it did not “change the law” but applied old law to new circumstances,’ says Scott. ‘Its impact was perhaps to encourage others to challenge their status in the court. Appeals in relation to the status of Uber workers and Addison Lee drivers are awaited.’

Given the UK courts have been ready and willing to apply worker status to gig economy workers, it would be surprising if the CJEU changed this judicial direction when it rules on the B v Yodel Delivery Network case, adds Scott.

The UK government, says Laura Morrison, a senior practice development lawyer in Dentons’ UK employment team, has agreed that the existing separate tests for employment law purposes and tax purposes are unhelpful.

‘Under employment law, an individual can be employed, self-employed or a worker,’ Morrison explains. ‘Tax law does not recognise the intermediate “worker” status. The courts have long applied a wide-ranging test taking account of many aspects of these relationships because no simple test works. It therefore seems unlikely a simple test can now be legislated without introducing new very arbitrary distinctions.’

All these new laws may provide some stability in a rapidly developing area, and set ground rules and expectations for all sides, Berkowitz says. On the other hand, he adds, ‘laws like AB 5 may provide stopgaps but are unlikely to fully address the challenges posed by a technology-induced displacement of employees, only one part of which represents the gig economy.’

Ultimately, he says, employers dependent upon human talent will need to put themselves and their workers in the best possible position to prepare for the displacement thrown up by the gig economy, automation and artificial intelligence. An essential part of this preparation, Berkowitz believes, will be to provide, facilitate, and encourage worker training.