The fight over independent contractor status doesn't end with the passage of California's AB5

With more than 1,000 Inman posts, Bernice Ross is a long-time contributor whose weekly column on real estate trends, luxury, marketing and other best practices publishes every Monday.

Editor’s note: AB5 passed the California State Senate on Tuesday. Read the full story here for its implications. 

Regardless of what happens with California’s landmark effort to regulate the gig economy, the real estate industry still has huge exposure nationally in terms of agent teams.

That’s because whatever other state legislatures decide to do in the wake of the bill’s successful passage, the employment classification status of real estate agents under various state laws around the country will still remain unclearly defined despite the pending legislation’s exemption of our industry from its reach.

The laws in most states provide for the broker of record to “supervise” their agents. There is nothing in state laws that authorize an independent contractor team leader to supervise another independent contractor agent on their team.

Previous litigation in this area provides some insight into how messy this could get: In previous labor classification-related legal actions against Zip Realty for example, several agents in different states sued Zip, claiming that the company didn’t fulfill its obligations to them as employees. Zip denied the allegations, saying that the agents were independent contractors. Zip had converted them to independent contractors after treating them as employees.

The California Labor Commissioner also came after Zip for “systemic violations of the supervision rules for independent contractors.”

Zip ultimately paid $5 million plus back taxes and other fines. In a similar case in Arizona, the amount was $1.7 million.

The current legislation headed toward California Governor Gavin Newsom’s desk for his signature codifies a 2018 California state Supreme Court opinion that establishes a three-pronged legal standard to determine whether someone is an independent contractor or employee.

The decision, Dynamex Operations West, Inc. v. Superior Court, significantly changed California’s established legal standards upon which businesses had relied to decide whether workers are independent contractors or employees.

The ‘ABC’ test

The “ABC” test is already used by other state authorities such as Massachusetts to determine whether state wage orders apply to workers. But it’s now the official test used in California to determine whether workers fall into the category of employee or contractor.

It stipulates that workers can only be classified as independent contractors if the hiring entity can demonstrate that it’s:

1. Not directing or controlling how a worker performs or accomplishes the work desired (either in a contract or an actuality)
2. That the work performed is outside of the hiring entity’s main business — for example, a plumber comes to fix your brokerage’s plumbing system
3. That “the worker is customarily engaged in an independently established trade occupation, or business”

The California State Supreme Court 2018 Dynamex decision had real estate and numerous other occupations scrambling to determine how they would weather the storm if businesses had to move from an independent contractor (IC) to an employee-based model. 

The current legislation that is moving quickly through the California state legislature codifies the court opinion, but exempts several industries. Real estate is one of them.  

Newsom himself backs the legislation, which is Assembly Bill 5. He blamed companies for shirking their responsibilities toward workers by categorically classifying them as independent contractors instead of employees with benefits in a Labor Day editorial in The Sacramento Bee.

“Reversing the trend of misclassification is a necessary and important step to improve the lives of working people. That’s why, this Labor Day, I am proud to be supporting Assembly Bill 5, which extends critical labor protections to more workers by curbing misclassification,” Newsom wrote.

The bill would officially designate independent contractors working for companies such as the ride-hailing companies Lyft and Uber as employees entitled to employee protections and benefits. Newsom has indicated that he’s open to working with the companies to find a more flexible solution, and he’s formed a labor-heavy Future of Work Commission to examine the options.

The Commission will work with the California think tank The Institute for the Future to convene meetings between stakeholders.

The current status of AB5

AB5 passed the California State Assembly in May by a vote of 53 to 11. In the Assembly version of the bill, there was an exemption for real estate and a number of other professions, but not for app-based gig economy companies such as Uber, Lyft and Instacart. 

On Aug. 30, 2019, the California State Senate Appropriations Committee amended and then advanced AB5 to the full Senate floor. Although the Senate version made some changes to the wording of the exemptions, the bill kept the carve-out for real estate. The revised bill as it stands at this moment reads:

The bill would exempt specified occupations from the application of Dynamex, and would instead provide that these occupations are governed by Borello. These exempt occupations would include among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry. 

The 1989 Borello decision has formed the basis of independent contractor status for real estate in California and would remain in effect as per the current exemptions in this version of AB5. 

What happens next?

AB5 still must be approved by the full California Senate before the legislature ends its current session on Friday, Sept. 13, 2019.

If the Senate passes the bill as it is expected to, the governor has 12 days to sign the bill. When that happens, the law would go into effect on Jan. 1, 2020.

But the ride-share companies have been lobbying the California legislature to pass an additional law that would establish a different set of rules for burgeoning gig economy.

According to the L.A. Times, the gig economy companies worry that AB5 “could create a national precedent for other states seeking to enact new worker protections, which would deliver a severe blow to smaller on-demand delivery players such as Postmates and DoorDash as well.”

At this point of time, it’s highly unlikely a new category will be established. A more likely scenario is that this issue will end up before California voters through their referendum process. Uber, Lyft and Doordash have pledged to spend $90 million dollars to support placing a referendum on AB5 on the ballot. 

So by the end of the week, we’ll learn the fate of AB5 and whether it will make it to the governor’s desk for signature and become law.

I recommend readers refresh themselves with my recommendations in my last column on the subject since this fight isn’t going to go away anytime soon.