California clamped down on the gig economy this week, with the state Assembly's passage of a bill that could force ride-hailing, delivery and other service companies to reclassify workers or change their business model.

AB5 would codify the California Supreme Court's adoption of the worker-friendly ABC test to determine employee classification in Dynamex Operations West v. Superior Court—but it's not yet finalized, and labor lawyers note exemptions could still be added for some gig economy jobs. The bill's next headed to the state Senate.

“Don't expect the Senate to pass it as it currently sits … there might be some more exemptions that are built into it,” said Richard Meneghello, a partner at Fisher & Phillips who focuses on the gig economy. “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.”

Mike Warren, a partner at McManis Faulkner, suggested in-house counsel concerned aspects of the bill would hurt their business and workers should share their companies' perspective with lawmakers.

If finalized and passed as is, the bill would not exempt drivers at Uber Technologies Inc. and Lyft Inc. from becoming employees. Both San Francisco-based ride-hailing companies which have faced misclassification suits from workers claiming employee status.

Under the ABC test, gig economy companies would have to show: workers perform their work free of the company's “control and direction,” complete work that is “outside the usual course of the hiring entity's business,” and that the worker is “engaged in an independently established trade.”

Stanford Law School professor William Gould said in the case of ride-hailing companies, drivers are supplying transportation and “the business of Uber and Lyft is transportation,” raising complications under the test.

“As long as the employee is able to show that he or she meets one of those ABC tests, then they're an employees,” Gould said. “The biggest problem [ride-hailing companies] are going to be confronted with is that these employees are performing work that is the essence of their business.”

Meneghello noted ride-hailing companies have argued they're in the business of maintaining an app that connects drivers and passengers rather than providing the ride.

For current classification status to hold up under AB5, as written, companies may need to reevaluate their relationship with workers and their business model, Warren said. If it's possible to change aspects of worker-company arrangements so that they more clearly fit the ABC test, Warren said in-house counsel should start those efforts now.

While it's still early for any major changes to business models, he and Meneghello said in-house counsel should have some idea about what steps their company would have to take if AB5 and the ABC test forced reclassification. That could include keeping workers classified as independent contractors and bracing for litigation or taking a look at what work could be moved to employee status.

“I don't think it's too soon to start sketching out some potential plans,” Meneghello said.

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