BILL ANALYSIS Ó AB 1727 Page A Date of Hearing: April 20, 2016 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Roger Hernández, Chair AB 1727 (Gonzalez) - As Amended April 13, 2016 SUBJECT: Hosting platforms: independent contractors SUMMARY: Establishes rights for specified independent contractors to organize and negotiate with "hosting platforms" regarding specified subjects. Specifically, this bill: 1)Defines a "hosting platform" as a facility for connecting people or entities seeking to hire people for work with people seeking to perform that work, using any medium of facilitation, including, but not limited to, a dispatch service, an Internet Web site, or other Internet-based site. This bill specifies that a "hosting platform" does not include a service provider if that entity provides only listings of goods or services that are contracted directly between buyers and sellers without the involvement of the provider and receives no income related to the price of the transaction. 2)Provides that an independent contractor who is not treated by a hosting platform as an employee and who does not employ his or her own employees shall have the right to engage in "group activity" with respect to one or more hosting platforms. AB 1727 Page B 3)Defines "group activity" to mean to self-organize, to negotiate as a group with one or more hosting platforms, or to engage together in other activities for the purpose of group negotiations or other mutual aid or protection, which activity includes, but is not limited, to the following: a) Communicating with each other and with hosting platforms, customers, and the public through any medium, including, but not limited to, social media and other electronic modes of communication. b) Withholding or restricting the amount of work done through a hosting platform at any time and for any duration. c) Boycotting or critiquing a hosting platform's business practices. d) Reporting to law enforcement authorities or making public practices of a hosting platform which an independent contractor reasonably believes violate local, state, or federal law and adversely affect either workers or clients, or both. 4)Specifies that work by an independent contractor is "labor" within the meaning of state antitrust law, and group activity by independent contractors shall not be subject to any statutory or common law prohibitions or limitation on combinations in restraint of trade, as specified. 5)Specifies that group activity is a "labor dispute" within the AB 1727 Page C meaning of specified provisions of law related to the issuance of injunctions during labor disputes. 6)Requires a hosting platform to meet at reasonable times and negotiate in good faith about "allowed subjects for negotiation" with any group of 10 independent contractors, as specified. 7)Defines "allowed subjects for negotiation" to mean: a) Pricing. b) Division of revenue. c) Priority for assignments or listings. d) Advertising by independent contractors on the hosting platform. e) Insurance. f) Acceptance and termination of independent contractor participation on the hosting platform. AB 1727 Page D g) Acceptance or refusal of services by independent contractors or customers. h) Responsibility for nonpayment by customers. 8)Provides that an individual or organization that represents independent contractors shall not be funded directly or indirectly by a hosting platform. 9)Provides that participation in the group by independent contractors shall be evidenced by electronic communication, as specified. 10)Provides that, at the request of the group, a written contract entered into after the conclusion of negotiations shall incorporate any agreement reached in those negotiations. 11)Requires the State Mediation and Conciliation Service (SMCS) to facilitate the performance of the obligation of the hosting platform to negotiate, to provide meeting space for negotiations, and to provide mediation services at the request of either side, as specified. 12)Requires SMCS to investigate any complaint by a group claiming a violation of the duty of the hosting platform to negotiate and, if it finds probable cause, to bring an action for injunctive and other appropriate equitable relief, as specified. AB 1727 Page E 13)Prohibits a person from retaliating against any independent contractor for exercising any rights established under this bill or for engaging in specified activity. Any person terminating or taking adverse action against an independent contractor within one year of exercising protected activities shall provide a written statement of the reason for termination or adverse action, as specified. 14)Provides that an independent contractor or their representative alleging a violation of this bill may bring an action in superior court and shall be entitled to all remedies available under the law or in equity, as specified, and treble damages for lost income for willful violations. 15)Provides that the exercise of any rights established by this bill shall not be admissible as evidence that a person is an independent contractor in any judicial or administrative proceeding. 16)Provides that nothing in this bill is intended to impact the determination of whether any worker is an employee or independent contractor or to impact any pending litigation. 17)Contains a severability clause. 18)Makes related legislative findings and declarations. AB 1727 Page F FISCAL EFFECT: Unknown COMMENTS: This bill addresses a number of issues that have arisen in recent years, particularly regarding what has generally come to be termed the "gig economy" or the "on-demand economy." These terms generally have come to mean an economic system largely (but not always) characterized by apps on smartphones that connect consumers to goods or services instantaneously. Transportation network companies (such as Uber and Lyft) are some of the more common examples of the "gig economy," but technology has seen this model proliferate across industries and economic sectors in recent years. According to the author, while much attention has been paid to this growing economic phenomenon, the gig economy serves as just a partial picture of the overuse of independent contractors in the workforce. Gig work is nothing new, as many industries have increasingly relied on independent contractors to cut their operating costs at the expense of worker protections for decades. Many Californians rely on work as an independent contractor as their primary source of income through "gig work." However, federal labor laws only apply to employees and not these workers. As such, gig workers and other independent contractors don't enjoy even the most basic workplace rights, such as minimum wage, social security, workers compensation, overtime, or the ability to seek reimbursement for expenses. The author argues that the current system is not working for many independent contractors, and this bill presents a potential policy solution to allow those workers to self-organize for improvement of their economic condition. Background on the "Gig Economy" AB 1727 Page G A recent paper<1> by the Congressional Research Service described the "gig economy" as follows: "The gig economy is the collection of markets that match providers to consumers on a gig (or job) basis in support of on-demand commerce. In the basic model, gig workers enter into formal agreements with on-demand companies (e.g., Uber, TaskRabbit) to provide services to the company's clients. Prospective clients request services through an Internet-based technological platform or smartphone application that allows them to search for providers or to specify jobs. Providers (i.e., gig workers) engaged by the on-demand company provide the requested service and are compensated for the jobs." How big is the gig economy? Due to its non-traditional nature, estimating the number of workers currently working in the gig economy is difficult. As the Congressional Research Service noted, characterizing the gig economy workforce is challenging because, to date, no large-scale official data have been collected. In addition, there remains considerable uncertainty about how to best measure this segment of the labor force. Existing survey data from the Bureau of Labor Statistics and the U.S. Census Bureau may provide some insights, but are imperfect proxy measures of contemporary gig economy participants<2>. However, the author notes that a recent poll<3> conducted by Time Magazine (and partners) found that 44 percent of U.S. adults have participated in these app-facilitated transactions, either as a consumer or worker, with about 14.4 million workers --------------------------- <1> Donovan, Sarah A., et al. "What Does the Gig Economy Mean for Workers?" Congressional Research Service (February 5, 2016). <2> Id. <3> http://time.com/4169532/sharing-economy-poll/ AB 1727 Page H depending on the on-demand economy as a major source of income. Concern for Workers and Workers' Rights in the "Gig Economy" The gig economy can have many benefits for workers. For example: "In some respects, these on-demand gigs benefit both workers and the economy, and help to support job growth and household incomes in the post-Great Recession labor market recovery. Such gigs often feature flexible hours, low or no training costs, and generally few barriers to worker entry. These features have enabled gig-economy workers, including those with other jobs, to generate new income or to supplement their primary incomes during difficult times in a strained job market. Moreover, customers purchasing such on-demand services have benefited from the convenience and availability of services as well as the low cost at which they are often offered."<4> However, others have argued that these benefits come at a price - economic exploitation, vulnerability, and lack of protection under existing employment and labor laws. For example, a recent report<5> by that National Employment Law Project (NELP) stated: "Most of the on-demand companies call their workers -------------------------- <4> Dokko, Jane, et al. "Workers and the Online Gig Economy." The Hamilton Project (December 2015). <5> Smith, Rebecca and Sarah Leberstein. "Rights on Demand: Ensuring Workplace Standards and Worker Security In the On-Demand Economy." National Employment Law Project (September 2015). AB 1727 Page I "independent contractors" or "1099 employees," after the IRS form that businesses give to nonemployees who provide them with services. Calling workers independent contractors greatly reduces companies' costs, including the costs associated with being an employer that apply to more traditional companies in their sectors. Workers who use the platforms to get work are led to believe they have no entitlement to social protections and benefits tied to employment. Instead, they are saddled with an annual self-employment tax (currently 15.3 percent) along with their income taxes, and with figuring out complex self-employment tax deductions and credits. At the same time, many of these companies take a sizeable commission-up to 20 percent or even 25 percent-from the workers' pay. Characterizing workers as non-employees has serious negative consequences for them: non-employees have no statutory right to minimum wage, overtime pay, compensation for injuries sustained on the job, unemployment insurance if involuntarily separated from employment, or protection against discrimination. They are not covered under their companies' employee benefits plans and have no federally protected right to join a union and collectively bargain with the companies for which they work. While workers can challenge their status, doing so often entails overcoming the threat of denial of future work, followed by protracted fact-finding and extensive litigation costs. Workers in these companies are performing the core work of their companies, the very essence of the employment relationship. Yet, while claiming that workers are independent entrepreneurs, the companies try to have it both ways. They often manage the workers as if they were employees, unilaterally setting rates for services, dictating how the services are provided, and screening, testing, training, evaluating, promoting, and disciplining workers based on the standards the companies set. For example, the home care company Honor boasts that it uses technology to monitor its home care aides to ensure that they arrive on time, are not checking Facebook or making social calls, and even that they AB 1727 Page J are walking around and not sitting down when they are supposed to be cooking a meal. The crowdsource site Clickworker advertises that it screens, trains, tests, and evaluates its clickworkers. The transportation company Lyft performs background and driving tests on its drivers, inspects their vehicles, instructs them how to greet passengers ("with a big smile and a fist bump"), establishes their rates, regulates the number of drivers on the road at any given time, and retains the right to terminate them "at any time, for any or no reason, without explanation," according to news reports and company statements quoted in court documents." NELP's report concludes that more must be done to protect workers in the gig economy: "Wage stagnation and burgeoning income inequality have led many to compare the current era to the Gilded Age of the late 19th century. Conditions for many workers in the on-demand economy replicate those of that age as well, before the enactment of New Deal legislation delivered basic labor rights, a social insurance safety net, income security, and the right of workers to organize. Businesses that use the 1099 model threaten to deny these basic worker rights to large numbers of workers. New technologies should not be allowed to displace existing protections for the many on-demand workers who are, in fact and in law, employees. We must ensure that these workers' rights are recognized and enforced. As new technologies develop, we must also develop new models of delivering core labor rights, including the right to take collective action aimed at expanding those rights and adapting them to specific industries.<6>" --------------------------- <6> Id. AB 1727 Page K Is the "Gig Economy" New or Just Déjŕ Vu All Over Again<7>? There has also been significant debate regarding whether the gig economy is a new phenomenon or simply represents a modern version of traditional worker exploitation and misclassification. The recent NELP report noted: "Companies in the on-demand economy have convinced many policymakers and many in the public that their app- or web-based businesses contribute to the economy by creating work, spurring economic growth, and addressing unmet public needs (i.e., by helping would-be entrepreneurs market their services and underutilized resources to consumers and businesses). A deeper examination, however, reveals that while these companies may have devised nontraditional ways to connect consumers and businesses to services, many have amassed often-huge revenues from time-tested and altogether traditional means: the labor of their workers. These companies' success may be due in part to their ability to attract consumers through the ease of their applications. But it owes just as much to the efficiency with which they squeeze labor from their workforces, spreading business risks downward to their workers, without whom they cannot succeed but to whom they have no commitment or accountability. At bottom, the companies are not delivering technology to their customers and clients-they use technology to deliver labor to them. Core features of the business model of many of these companies include calling workers "independent contractors," breaking jobs into small tasks that create erratic schedules -------------------------- <7> Apologies to the late Yogi Berra. AB 1727 Page L and fluctuating income, and making it difficult for workers to take collective action<8>." As NELP notes elsewhere it its report, "[T]hese on-demand companies are actually performing a labor-brokering function that is not new but has been around for decades. At its core, their business is to dispatch workers who provide services to consumers and businesses."<9> This sentiment was also echoed in a recent Executive Council statement issued by the national AFL-CIO: "In fact, this debate has much in common with the decades-long debate over employee misclassification. Federal Express, which violated the law by misclassifying its drivers as independent contractors, competes with United Parcel Service, a company that delivers packages with employees represented by a union. Public policy should not give an advantage to the Fed Ex model over the UPS model. Nor should public policy encourage the "1099 model" over the "W-2 model" in the on-demand economy. Many on-demand companies treat their workers as W-2 "employees"-Hello Alfred, Munchery, Managed by Q, Bridj, MyClean and BlueCrew, to name a few. Other employers have switched some or all of their workers to "employee" status; for example, Honor, Instacart, Shyp, Eden, Sprig and Luxe. Every worker who meets the basic definition of "employee" should enjoy all of an employee's legal rights and protections. The reasons why businesses want to shed their responsibilities as employers are not new or limited to the on-demand economy. Since the 1980s, Wall Street's pursuit of short-term returns in the name of "maximizing shareholder value" has pressured all kinds of businesses to evade their responsibilities as -------------------------- <8> Id. <9> Id. AB 1727 Page M employers, and shift risk to workers. Corporations have responded to these pressures by outsourcing and off-shoring jobs, by switching to workforces composed of "permatemps" and part-time workers, by using just-in-time scheduling and adopting the franchising model, and by misclassifying their employees as independent contractors. The new platforms that treat workers as independent contractors are responding to similar demands from venture capital investors for high returns. For decades these various forms of precarious work have been the reality for a significant and growing part of the workforce, and especially for people of color, immigrants and women. Often the conditions of work meet the definition of an "employee," and yet they still lack the bargaining power to improve pay and working conditions. Employee status by itself is no guarantee of decent work, but the rights and protections of employee status long have been the foundation on which we strengthen our bargaining power.<10>" As the NELP report argues, the use of independent contractors is not a "new" or "innovative" approach: "The 1099 business model is not new. For decades, employers in many industries, including taxi, agriculture, construction, janitorial, landscaping, home health care, delivery, and port truck driving have called their workers "independent contractors." Nor is unstable work new: companies such as staffing agencies and users of day labor have long made workers bid for jobs on a daily basis, work for piece rate, or contract for short-term jobs. Many on-demand companies are -------------------------- <10> AFL-CIO Executive Council Statement. "The Policy Choices We Make Now Will Help Determine the Future of Work." (February 24, 2016). AB 1727 Page N using increasingly sophisticated technologies to import these business models to online platforms, with some even claiming they are not in the business of providing services at all, but simply an app for the use of workers with whom they have no lasting relationship." Independent Contractor vs. Employee Status Generally Under California law, employment generally occurs when an employer engages in the services of an employee for pay. The Industrial Welfare Commission Wage Orders define an "employer" as any person who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours or working conditions of any person. A common law employee is an individual who is hired by an employer to perform services where the employer has the right to exercise control over the manner and means by which the individual performs his or her services. In contrast, California common law generally defines an independent contractor as any person who renders service for a specified recompense for a specified result, under the control of a principal as to the result of his or her work only and not as to the means by which such result is accomplished. The party seeking to avoid liability as an employer has the burden of proving that persons whose services he or she has retained are independent contractors rather than employees. In other words, there is a presumption of employment. S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, (1989) 48 Cal. 3d 341; Labor Code Section 3357. In determining whether an individual providing service to another is an independent contractor or an employee, there is no single determinative factor. Rather, it is necessary to closely examine the facts of each service relationship and to then apply a multi-factor or "economic realities" test. Borello at 351. AB 1727 Page O An important, but not necessarily determinative, factor involves the independent contractor's right to control the manner and means of accomplishing the desired result. Other factors considered in this determination, as set forth by the Borello court, include the following: 1) Whether the person performing services is engaged in an occupation or business distinct from that of the principal; 2) Whether or not the work is part of the regular business of the principal; 3) Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work; 4) The alleged employee's investment in the equipment or materials required by the task; 5) The skill required in the particular occupation; 6) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; 7) The alleged employee's opportunity for profit or loss depending on his or her managerial skill; 8) The length of time for which the services are to be performed; 9) The degree of permanence of the working relationship; 10) The method of payment, whether by time or by the job; 11) Whether or not the parties believe they are creating an employer-employee relationship These "individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations." Id. As discussed above, although no single factor is decisive, the right to control the manner and means used is generally the most important factor. In addition, some administrative agencies have broadened the test to include other factors. Brief Background on Employment Misclassification AB 1727 Page P Employee misclassification has become a serious problem in the United States, and particularly in California. When companies misclassify workers as independent contractors instead of as employees, these workers do not receive worker protections, including minimum wages, overtime pay, and health and vacation benefits, to which they would otherwise be entitled. Standard employee protections such as anti-discrimination laws and safety regulations also do not apply to independent contractors. Additionally, businesses do not deduct taxes, 401(k), Social Security, or Medicare payments from the paychecks of independent contractors, which results in a loss of state tax income from the businesses as well as a potential loss of income from the individual worker who may not properly report income. Because employers do not pay unemployment taxes for independent contractors, workers who are misclassified cannot obtain unemployment benefits if they lose their jobs. A number of reports in the last several years have chronicled the societal consequences of and impacts upon American workers of misclassification of workers as independent contractors versus employees. These concerns led to the passage of SB 459 (Corbett) from 2011, which established significant civil penalties for the intentional misclassification of individuals as independent contractors rather than employees. Definition of "Independent Contractor" Under the National Labor Relations Act As discussed above, this bill provides that an independent contractor who is not treated by a hosting platform as an employee and who does not employ his or her own employees shall have the right to engage in "group activity" with respect to one or more hosting platforms. Therefore, it is useful to briefly consider the statutory treatment and definition of independent AB 1727 Page Q contractors under the NLRA. In defining "employees" for purposes of coverage under the NLRA, the Act specifically excludes "any individual having the status of an independent contractor" (29 U.S.C. § 152(3)). In enacting the NLRA, Congress did not define "independent contractors," but intended that in each case the issue should be determined by the application of general agency principles. NLRB v. United Insurance Co. (1968) 385 U.S. 254. The major principle, regularly enunciated by the National Labor Relations Board (NLRB) and the courts, is that the appropriate test to apply in determining whether certain individuals are independent contractors (and not under the NLRA) or employees (and therefore under the NLRA) is the common law of agency right-to-control test. Under this test, an employer-employee relationship exists when the employer reserves the right to control not only the ends to be achieved, but also the means used in achieving the ends. Lake Pilots Assn . , 320 NLRB 168 (1995). On the other hand, when control is reserved only as to the result sought, an independent contractor relationship exists. Gold Medal Baking Co., 199 NLRB 895 (1972). Antitrust Issues Under Federal Law In general, the primary purpose of federal and state statutory antitrust law is to prevent businesses from creating unjust monopolies or competing unfairly in the marketplace. However, throughout the nineteenth century, federal and state antitrust laws were used not only against businesses, but were aimed at labor unions as well. In 1890, Congress passed the Sherman Anti-Trust Act, the basic federal antitrust statute, which declared illegal "every contract, combination?or conspiracy in restraint of trade." Following its enactment, many courts used the Sherman Act to hold unions liable for antitrust violations. This application of the federal antitrust laws to organized AB 1727 Page R labor culminated in the Supreme Court decision in Loewe v. Lawlor (1908) 208 U.S. 274, the famous "Danbury Hatters" case, in which the Court upheld the applicability of the Sherman Act to unions and union activities. Application of the federal antitrust laws to labor unions in the "Danbury Hatters" case created widespread resentment and placed substantial pressure on Congress for a labor exemption to the Sherman Act. As a result, in 1914 the Clayton Act was passed. The labor exemption was further articulated with the passage of the Norris-LaGuardia Act in 1932. Both of these provisions declare that labor unions are not combinations or conspiracies in restraint of trade, and specifically exempt certain union activities such as secondary picketing and group boycotts from the application of federal antitrust laws. Antitrust Issues Under State Law California's general antitrust law, known as the Cartwright Act, generally prohibits combinations of two or more persons' capital, skill, or acts to restrict trade or commerce, reduce the production of merchandise, increase the price of a commodity, prevent competition, or control or fix at a standard or figure any commodity. (Business and Professions Code Section 16600, et seq.) Like its federal counterpart, the Cartwright Act contains a labor exemption. This exemption is found in Business and Professions Code Section 16703, which provides: "Within the meaning of this chapter, labor, whether skilled or unskilled, is not a commodity." Like its federal Clayton Act counterpart, Section 16703 was intended to insulate from antitrust liability concerted activities by workers seeking to improve their working terms and conditions. In certain circumstances, case law has extended the labor exemption under the Cartwright Act to individuals who were not technically employees. For example, in L.A. Pie Bakers Assn. v. Bakery Drivers Local No. 276, (1953) 122 Cal. App. 2nd 237., an AB 1727 Page S association of bakers sued a union whose members included two groups of delivery drivers: the bakers' own employees and a group of independent drivers who bought pies from the bakers and then resold them to the same types of customers. Refusing to agree to a contract specifying the independent drivers' compensation, the bakers argued that the contract was a price-fixing arrangement, illegal under the Cartwright Act. However, the court held that it was immaterial to the labor exemption that the independent drivers were not, strictly speaking, employees of the bakers. More significant to the court was that their "economic function" was the same as the employee drivers, and the compensation proposed for their services, "in essence, is the equivalent of wages for overall services in delivering the pies from plaintiffs' plants to the customers." Id. at 239. The labor exemption under the Cartwright Act therefore applied to this form of "price fixing" because it covered wages, or their equivalent, and hence had "some reasonable relation to working conditions and the right and purposes of collective bargaining." Id. at 243. A similar holding was reached in California Dental Association v. California Dental Hygienists' Association, (1990) 222 Cal. App. 3d 49, as case alleging that the dental hygienists were conspiring to fix and inflate compensation paid by dentists. Interplay Between Federal and State Regulation: The "State Action" Doctrine The "state action" doctrine recognizes that the federal government did not intend to supersede the authority of the states through antitrust regulation. This theory is based on the notion that states are sovereign and, as a result, state action should not be subject to antitrust scrutiny. This AB 1727 Page T doctrine was first articulated by the Supreme Court in 1943 in the case of Parker v. Brown, 317 U.S. 341, in which the Court declared that the Sherman Act was not intended to apply to the activities of the States. Under this doctrine, a state acting within its own domain may structure its economic market as it sees fit. The state may allow completely unfettered competition, or substitute a competitive market structure with regulation. The state action doctrine provides that a private party is immune from federal antitrust law if it can show that the state has displaced competition via regulation. As further articulated by the Supreme Court, a two-part test is utilized to show requisite state action. California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97 (1980). First, the conduct is exempt if it is undertaken pursuant to a "clearly articulated" state law that displaces competition with a regulatory scheme. Second, the conduct is exempt if it is "actively supervised" by the state. This latter requirement is generally seen as ensuring that the private parties are acting to fulfill the state's objectives, rather than for purely self-motivated purposes. "[T]he analysis asks whether the State has played a substantial role in determining the specifics of the economic policy. The question is?whether the anticompetitive scheme is the State's own." Id. at 105. Recent City of Seattle Ordinance Last fall, the City Council of Seattle, Washington considered an ordinance to provide drivers of taxi, for-hire, and transportation network companies the opportunity to collectively negotiate for improved working conditions. The Council unanimously adopted the ordinance in December 2015. Under the terms of the ordinance, drivers with city-issued licenses that have performed a minimum threshold of trips will be eligible for collective representation. The City of Seattle will certify organizations as eligible "driver representative organizations." Upon request, the driver representative AB 1727 Page U organization will receive a list of eligible drivers at each company have 120 days to demonstrate that a majority of drivers choose to be represented. Once verified, the driver representation organization will be authorized to engage in collective bargaining over specified issues on behalf of the represented drivers. On March 3, 2016, the U.S. Chamber of Commerce filed a federal lawsuit challenging the ordinance. The lawsuit raises various challenges under state law, but the primary basis for the challenge is violation of the federal Sherman Antitrust Act (arguing that it would allow for independently contracted drivers to engage in unlawful price fixing) and the National Labor Relations Act (arguing that it is preempted by federal labor law). The complaint specifically notes that the "NLRB has not definitively resolved the employee status of drivers who receive ride requests from software applications and, indeed, as to certain drivers, that issue is currently pending before the NLRB." Other Recent Litigation and Administrative Action The question of whether certain gig economy workers, particularly drivers for transportation network companies, have been misclassified as independent contractors has also been the subject of various administrative claims and lawsuits. These include the following: California Labor Commissioner AB 1727 Page V In June 2015, the Division of Labor Standards Enforcement issued a decision holding that an Uber driver was an employee, and therefore entitled to expense reimbursement under California law (mileage reimbursement and toll fees) and interest. Berwick v. Uber Technologies (Case No. 11-46739). The decision stated, "Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation. The reality, however, is that Defendants are involved in every aspect of the operation." Uber has appealed the decision. Uber Class Action Lawsuit A lawsuit is currently pending in federal court in California alleging that Uber drivers were misclassified as independent contractors rather than employees. In September 2015, U.S. District Judge Edward Chen in San Francisco allowed the lawsuit to proceed as a class action. However, on April 5, 2016, the U.S. Court of Appeals for the 9th Circuit said it would allow Uber to appeal the class certification order. A jury trial had been selected for June 20, but it is likely that the appeal will delay trial in the matter. Lyft Lawsuit and Proposed Settlement In 2013, a similar lawsuit was filed, alleging that Lyft drivers in California had similarly been misclassified as independent contractors rather than employees. The parties had reached a tentative settlement of approximately $12.5 million. However, following objections filed by drivers represented by the Teamsters, U.S. District Judge Vince Chhabria recently ruled that the agreement was insufficient. The settlement agreement "does not fall within the range of reasonableness," Chhabria wrote. The judge asked the attorneys of both parties to come to a new agreement by May. AB 1727 Page W Other Recent Legislative Efforts to Utilize the "State Action" Doctrine In prior years, legislative efforts have attempted to utilize the state action doctrine to allow various individuals to engage in collective activity. SB 848 (Dunn) of 2005 attempted to utilize the state action doctrine to allow port owner-operator truck drivers to organize for purposes of collective bargaining. This effort followed years of concern about the misclassification of California's port truck drivers as independent contractors rather than employees. SB 848 was vetoed by Governor Schwarzenegger who, among other things, expressed concern that the bill would violate federal antitrust law and result in a "litigious firestorm." SB 1213 (Dunn) from 2006 was identical to SB 868. SB 1213 was similarly vetoed by Governor Schwarzenegger. More recently, the state action doctrine has been proposed as a mechanism to authorize family child care providers to form, join and participate in "provider organizations" for purposes of negotiating with state agencies on specified matters. The most recent bill to attempt to do so was SB 548 (De Leon) of 2015; however, the organizing provisions were subsequently amended out of the bill. Prior legislative efforts to utilize the state action doctrine in the context of subsidized child care providers include, but are not limited to, AB 641 (Rendon) of 2013, AB 101 (John A Pérez) of 2011, and SB 867 (Cedillo) of 2008. None of these AB 1727 Page X bills were enacted into law. Other Recent Policy Proposals for the "Gig Economy" As discussed above, there has been significant debate among academics and worker advocates regarding the best solution to protecting workers in the gig economy, and a number of policy suggestions have been proposed. Some of the more notable include (1) treating these workers as the employees they truly are and enforcing existing laws against misclassification, (2) granting these individuals the right to engage in collective activity, regardless of their employment status (the approach essentially taken in this bill and the Seattle ordinance discussed above), (3) creating a new third category of "dependent contractors" who would receive some, but not all, of the protections of employee status, and (4) creating a system of "portable benefits" for gig economy workers and other independent contractors that would provide some level of safety net protections and employee benefits that would follow the individual from job to job<11>. Key Provisions of this Bill Definitions and Scope of the Bill Although much of the debate surrounding the gig economy has focused on app-based platforms such as transportation network companies (such as Uber and Lyft), this bill is not limited to such situations. --------------------------- <11> See, for example, "Common Ground for Independent Workers: Principles for Delivering a Stable and Flexible Safety Net for All Types of Work" at https://medium.com/the-wtf-economy/common-ground-for-independent- workers-83f3fbcf548f#.ra9kc85df AB 1727 Page Y This bill defines a "hosting platform" as a facility for connecting people or entities seeking to hire people for work with people seeking to perform that work, using any medium of facilitation, including, but not limited to, a dispatch service, an Internet Web site, or other Internet-based site. The bill specifies that a "hosting platform" does not include a service provider if that entity provides only listings of goods or services that are contracted directly between buyers and sellers without the involvement of the provider and receives no income related to the price of the transaction. Group Activity and Obligation to Negotiate This bill provides that an independent contractor who is not treated by a hosting platform as an employee and who does not employ his or her own employees shall have the right to engage in "group activity" with respect to one or more hosting platforms. "Group activity" is defined to mean to self-organize, to negotiate as a group with one or more hosting platforms, or to engage together in other activities for the purpose of group negotiations or other mutual aid or protection, which activity includes, but is not limited, to the following: Communicating with each other and with hosting platforms, customers, and the public through any medium, including, but not limited to, social media and other electronic modes of communication. Withholding or restricting the amount of work done through a hosting platform at any time and for any duration. Boycotting or critiquing a hosting platform's business practices. AB 1727 Page Z Reporting to law enforcement authorities or making public practices of a hosting platform which an independent contractor reasonably believes violate local, state, or federal law and adversely affect either workers or clients, or both. This bill requires a hosting platform to meet at reasonable times and negotiate in good faith about "allowed subjects for negotiation" with any group of 10 independent contractors, as specified. "Allowed subjects for negotiation" is defined to mean (1) pricing, (2) division of revenue, (3) priority for assignments or listings, (4) advertising by independent contractors on the hosting platform, (5) insurance, (6) acceptance and termination of independent contractor participation on the hosting platform, (7) acceptance or refusal of services by independent contractors or customers, and (8) responsibility for nonpayment by customers. Process for Evidence of Participation in Group Activity This bill provides that participation in the group shall be evidenced by an electronic communication from an independent contractor using the same address the independent contractor uses to communicate with the hosting platform, or a physical document signed by the independent contractor, sent to either the hosting platform or to one or more other members of the group accepting participation in the group and agreeing to be bound contractually by the outcome of any negotiations between the group and the hosting platform. The bill specifies that an independent contractor shall not be bound by the outcome of any negotiations between a group and a hosting platform unless the independent contractor has given that authorization. Enforcement AB 1727 Page A This bill requires the State Mediation and Conciliation Service (SMCS) to facilitate the performance of the obligation of the hosting platform to negotiate, to provide meeting space for negotiations, and to provide mediation services at the request of either side, as specified. The bill also requires SMCS to investigate any complaint by a group claiming a violation of the duty of the hosting platform to negotiate and, if it finds probable cause, to bring an action for injunctive and other appropriate equitable relief, as specified. This bill prohibits a person from retaliating against any independent contractor for exercising any rights established under this bill or for engaging in specified activity. Any person terminating or taking adverse action against an independent contractor within one year of exercising protected activities shall provide a written statement of the reason for termination or adverse action, as specified. Finally, this bill provides that an independent contractor or their representative alleging a violation of this bill may bring an action in superior court and shall be entitled to all remedies available under the law or in equity, as specified, and treble damages for lost income for willful violations. Disclaimer Language This bill provides that the exercise of any rights established by this bill shall not be admissible as evidence that a person is an independent contractor in any judicial or administrative proceeding. This bill also provides that nothing in it is intended to impact the determination of whether any worker is an employee or independent contractor or to impact any pending litigation. AB 1727 Page B Arguments in Support The California Teamsters Public Affairs Council (Teamsters) supports this bill, arguing that a large number of workers are treated by employers as independent contractors rather than employees. Often these workers are misclassified because to do so allows the employer to avoid paying benefits, payroll taxes, or provide health insurance or workers' compensation coverage for those workers. In the new so-called "sharing economy," where workers are dispatched to perform work through their cell phones virtually all the companies treat the workers as independent contractors. The Teamsters state that, while this bill does not absolve employers who misclassify their workers from liability, the bill does give workers who are treated as independent contractors a path to organizing for their mutual aid and protection. The Teamsters go on to state that, "We do think there are many issues that must be dealt with in this bill as it moves through the legislative process. These include: The creation of appropriate collective bargaining units and exclusive representation by labor organizations. The scope of bargaining. A prohibition on the establishment of "company unions" and the execution of "yellow dog contracts," in which workers, as a condition of employment, are required to sign an agreement waiving their right to organize. The proper role of government oversight and binding arbitration of contractual and other issues." AB 1727 Page C The Teamsters conclude, "We look forward to working with the author to resolve these and other issues as the bill moves through the Legislature." Similarly, the UFCW Western States Council supports this bill, stating, "We recognize that a variety of issues still remain to addressed and resolved in [this bill] but given your professional background, intellect and commitment for workers to have a collective voice in organizing in this new economy industry?[w]e are confident that your leadership will enlighten the public policy process as we move forward with this bill." Arguments in Opposition Opponents, including the California Chamber of Commerce (CalChamber) oppose this bill, arguing that it will stifle innovation, create higher prices and costly litigation for consumers, jeopardize the use of independent contractors in almost every industry, and create uncertainty for years in California until the courts can resolve the legal debate of whether allowing independent contractors to set prices is lawful conduct. First, they argue that this bill applies to all industries, not just the "gig economy." They note that he definition of "hosting platform" is any "facility" used to connect people or entities seeking services or work with those who want to perform such work, through the use of any medium, including but not limited to, a dispatch service, website or other internet based site. The mere incident of a telephone conversation with an intermediary to connect two people for the purpose of engaging one another in a contract for services or work would qualify as a "hosting platform." Accordingly, the scope of this proposal is broad and its onerous bargaining requirements will detrimentally impact California's economy. AB 1727 Page D Second, CalChamber states that this bill will ultimately harm consumers through higher prices and litigation. They argue that, given the broad scope of this proposal, independent contractors who perform accounting services, home maintenance, child care, elder care, educational tutoring, professional consultation, etc., could determine a set price for their services that could essentially price consumers out of the market. Moreover, they contend that this bill exposes consumers of such services to costly and expensive litigation because the bill language requires a "person" that terminates the services of an independent contractor who has engaged in any of the protections of this bill within one year preceding the termination to provide a detailed statement of the reasons for the termination. Failure to do so exposes that "person" to civil litigation with a threat of treble damages. Accordingly, a consumer who chooses to no longer utilize the services of an independent contractor because the independent contractor collectively bargained to set higher prices must provide the independent contractor with a detailed statement of the reasons for the termination or face costly litigation for failing to do so. Third, opponents argue that this bill discourages innovation and new work opportunities. They argue that the "gig economy," which allows individuals to control their work schedules, such as days and hours of work, as well as the total number of hours they work, is a new model that actually benefits the worker. This bill would destroy this innovation and eliminate the flexibility and opportunities that workers currently enjoy. By allowing a minority of workers in the industry to essentially dictate the prices and contractual terms of engagement, this bill will force such companies to limit opportunities for workers. Finally, opponents argue that this bill is likely unlawful under the federal Sherman Antitrust Act and will create uncertainty until struck down by the courts. Specifically they state: AB 1727 Page E "Under [this bill], there is no clearly articulated policy as to the need for independent contractors in almost every industry to have the ability to collectively bargain. Second, the state is not "actively engaged" in the mandated bargaining, as required. In fact, the State Mediation Conciliation [Service] is only involved when asked to "facilitate" a hosting platform's obligation to negotiate, such as providing "meeting space," to mediate a dispute, or to investigate a claim alleging a violation. Otherwise, there is no state involvement. Under [this bill], ten independent contractors can enter into an agreement to set prices with a hosting platform, and never utilize or seek assistance from the State at all. As the Supreme Court noted in Parker, a state cannot receive immunity from the Sherman Act simply by authorizing private parties to violate the Act through anticompetitive agreements. Parker, 63 S.Ct. at 314. Rather, the state must be an active participant. Given that [this bill] permits private participants to set prices for consumers without oversight by the State, it is likely a violation of the Sherman Act. The San Francisco Taxi Workers Alliance opposes this bill, arguing that the rights and protections workers would gain under the bill are far weaker than those afforded to employees under the law. They are concerned that this bill could undermine current litigation seeking to confirm the employee status of certain individuals and adversely affect the rights of others who work under similar conditions. This bill is double-referred to the Assembly Judiciary Committee should it pass this Committee. REGISTERED SUPPORT / OPPOSITION: AB 1727 Page F Support California Teamsters Public Affairs Council Richard McCracken (co-sponsor) Richie Ross (co-sponsor) UFCW Western States Council Opposition American Staffing Association Brea Chamber of Commerce California Asian Pacific Chamber of Commerce California Association for Health Services at Home California Chamber of Commerce California League of Food Processors California Manufacturers and Technology Association California Newspaper Publishers Association California Pool and Spa Association California Professional Association of Specialty Contractors California Retailers Association California Trucking Association Camarillo Chamber of Commerce Carlsbad Chamber of Commerce CAWA - Representing the Automotive Parts Industry El Dorado County Chamber of Commerce Foreign Trade Association Harbor Trucking Association AB 1727 Page G Internet Association National Federation of Independent Business North Orange County Chamber of Commerce Oxnard Chamber of Commerce Rancho Cordova Chamber of Commerce Redondo Beach Chamber of Commerce & Visitor's Bureau San Francisco Taxi Workers Alliance San Pedro Chamber of Commerce Santa Maria Valley Chamber of Commerce Visitor & Convention Bureau South Bay Association of Chambers of Commerce Southwest California Legislative Council TechNet The Chamber of the Santa Barbara Region Wine Institute Analysis Prepared by:Ben Ebbink / L. & E. / (916) 319-2091