New California Law Upends Economics of Using Independent Contractors

California Gov. Gavin Newsom on Wednesday signed into law a new measure that will require many companies using independent contractors such as drivers to hire them as employees and provide  benefits, dramatically changing the gig economy relied on by many ecommerce companies.

Uber and Lyft in particular had lobbied hard to gain exemptions under the law, which was not allowed. They will likely challenge that determination in court, arguing their workers still qualify as independent contractors.

The new law, called AB5, will go into effect on Jan. 1. Drivers and other workers among the hundreds of thousands of independent contractors in California will for the first time be eligible for benefits like health insurance, overtime, paid medical leave and a $12 minimum wage.

Many professions are exempt from the law because they set or negotiate their own rates, communicate directly with customers and make at least twice minimum wage, according to the San Francisco Chronicle. These include doctors and lawyers, real estate agents, marketing professionals and freelance journalists and photographers.

“I am now in a position to earn a living wage,” driver Anette Rivero, a member of Rideshare Drivers United, told Vox in a statement. “Instead of spending over 50 hours a week on the road, I will be able to spend time with my four children and complete my college degree.”

According to the Chronicle, AB5 uses a three-step test to determine if a company needs to classify a worker as an employee: If they perform tasks under a company’s control; if their work is integral to the company’s business; and if they don’t have independent enterprises in that trade.

Especially as ecommerce has flourished and customer demands for faster delivery have been amped up by Amazon and others, grocers and other merchants have relied on last-mile startups such as Instacart, Postmates, Doordash and many others using independent contractors as drivers. When AB5 goes into effect it will put a serious crimp in that business model for those doing business in California.

Deliv, which had used a contractor model for its army of delivery drivers, got out ahead of the California law in June by creating a subsidiary that hired drivers as employees. It launched in Sacramento and is being rolled out across the state this year.

The company said the move was in response to the needs of its clients, partners and drivers, and “the ever-evolving legal and regulatory landscape of the classification of independent contractors in California.” It added that cost effective same-day delivery was more dependent on technology and business model than on worker classification.

“In any disruptive market, you want to build as much flexibility in the system as possible to support changing requirements and preferences over time,” said Deliv CEO and founder Daphne Carmelli in the release. “We are happy that the decisions and investments we’ve made over the past seven years allow us to easily adjust to evolving market environments.”