On California’s New Gig Economy Law: Don’t Relax Just Yet

I feel pretty certain that anybody that is reading Notorious likely already knows that the legislature of California has passed Assembly Bill 5 (AB5) that tries to rein in the so-called “gig economy” workers. The bill is headed to Gov. Newsom for signature, and it appears that he will indeed sign it, especially given statements like this one:

Contributing to this imbalance is the misclassification of workers, where companies eager to save on labor costs identify workers as “independent contractors” rather than employees. Workers lose basic protections like the minimum wage, paid sick days and health insurance benefits. Employers shirk responsibility to safety net programs like workers’ compensation and unemployment insurance. Taxpayers are left to foot the bill.

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.

So AB5 will soon be law in California. But don’t panic!

It appears that the California Association of REALTORS has plenty of muscle in Sacramento, because real estate agents are exempt from the provisions of AB5 and will remain classified as 1099 independent contractors. Kudos to Joel Singer and his legislative affairs team for their big win here. It could not have been easy to go up against the mighty labor unions in California and win, but that’s exactly what they did.

Having said that… it’s actually a bit more complicated. So I thought it worth jotting down a few thoughts on AB5 and its implications, and caution you not to relax just yet.

It goes without saying that while I might be a retired member of the NY Bar, I am not currently practicing law and even if I were, I am not your lawyer. So please consult your attorney for actual legal advice.

Quick Overview of AB5

In order to understand why I’m urging caution, it’s important to understand what it is that AB5 does and does not do.

It does not simply say that independent contractors are now employees under California law. What it says is a bit more complex and a bit more legalistic. Here’s the key passage from the actual bill:

(e) It is also the intent of the Legislature in enacting this act to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave. By codifying the California Supreme Court’s landmark, unanimous Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.

So what it actually does is implement the ABC test from Dynamex. I’ve spent many thousands of words on Dynamex but you can refresh your memory with this post from May of last year. And here’s what I wrote then:

Basically, the Court adopts the “ABC Test” instead of a complicated multi-factor test (known as the Borello test in California). The ABC Test begins by assuming that everyone is an employee of the company that “employs” them. To make someone an independent contractor, the employer has to prove:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Those “and” in between each element means exactly that: you have to prove all three in order to classify someone as an independent contractor.

That would obviously make all real estate agents employees, since they all perform work within the usual course of the hiring entity’s business, namely, helping people buy and sell houses.

But, thanks to CAR and its capable lobbying staff, the passage most relevant to real estate brokers and agents in California is this one:

(1) A real estate licensee licensed by the State of California pursuant to Division 4 (commencing with Section 10000) of the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by subdivision (b) of Section 10032 of the Business and Professions Code. If that section is not applicable, then this determination shall be governed as follows: (A) for purposes of unemployment insurance by Section 650 of the Unemployment Insurance Code; (B) for purposes of workers compensation by Section 3200 et seq.; and (C) for all other purposes in the Labor Code by Borello. The statutorily imposed duties of a responsible broker under Section 10015.1 of the Business and Professions Code are not factors to be considered under the Borello test.

So we’re good, right?

Well, yes and no.

Yes, brokers appear to be in the clear after AB5 from the charge of misclassifying employees unless they do some really egregious stuff. As the language above says, “statutorily imposed duties of a responsible broker under Section 10015.1 of the Business and Professions Code are not factors to be considered under the Borello test” but that doesn’t mean a broker can start setting hours and mandatory meetings and such and still keep pretending his agents are independent contractors.

Because what AB5 does not do is declare that real estate licensees are statutory employees. What it does is to say that Dynamex will not apply when it comes to real estate licensees, but that the older Borello test will, and that statutory duties will not be a factor in the Borello test. I might repeat this a few times in this post because it’s relatively hard to understand from the language of the statute.

So what is this Borello test?

The Borello Multi-Factor Test

Let me refer you to an expert on the topic, the law firm of Pepper Hamilton:

The Borello test evaluated multiple factors to determine whether an individual was an independent contractor. Not all of the factors had to be met to establish independent contractor status. The principal factor of the Borello test was whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” The test also included nine additional factors:

(1) right to discharge at will, without cause;

(2) whether the one performing the services is engaged in a distinct occupation or business;

(3) 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;

(4) the skill required in the particular occupation;

(5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(6) the length of time for which the services are to be performed;

(7) the method of payment, whether by the time or by the job;

(8) whether or not the work is part of the regular business of the principal; and

(9) whether or not the parties believe they are creating a relationship of employer-employee.

Borello, 48 Cal. 3d at 351.

We won’t know, obviously, until there’s a lawsuit of some kind with this new law in place, but seems to me that the trouble spots for real estate under the Borello test will be #3 and #5.

If the broker limits the “direction of the principal” to those statutory supervisory duties under the real estate license law, and does not force the agent to come to the office, use the broker’s tools, platform, database, whatever, and drive around in the brokerage’s van… the broker is likely in the clear.

Thing is, Section 10015.1 of the Business and Professions Code says this:

“Responsible broker” means the real estate broker responsible for the exercise of control and supervision of real estate salespersons under Section 10159.2, or a licensee subject to discipline under subdivision (h) of Section 10177 for failure to supervise activity requiring a real estate license. The supervision of a salesperson required under this part or any other law is limited to regulatory compliance and consumer protection. [Emphasis added]

It’s going to be a real stretch to suggest that lead generation activities fall under “regulatory compliance” or “consumer protection.” I mean, you could try, I suppose… but it feels dicey to me. (But ask your attorney! Because I’m not your lawyer!)

Where things get really interesting, as I have been saying for a while now, is when the Borello test is applied to agent teams.

Do Agent Teams Pass the Borello Test?

Remember: what AB5 does is to apply the older Borello test rather than the newer Dynamex ABC-test to real estate. The exemption is an exemption from a legal standard, not a complete exemption from employee status.

It seems clear to me that whatever exemption from the Dynamex ABC test was granted was granted only to brokers. Agent team leaders have no statutory duty to supervise and control the agents on their teams — indeed, I would argue that they have no statutory authority to supervise and control them. If they did, they would be brokers or at least managers under California law.

Yet, you know and I know and everybody and his grandmother knows (if she’s in real estate) that the team leader very much supervises and controls the agents on the team.

This example comes from a top Keller Williams agent team in South Carolina, not California, but you can’t tell me that hundreds of California agent teams don’t do the exact same thing:

The accompanying text reads:

Every day, you can find this hard-working group of professionals prospecting from 9-12 for buyers for our sellers’ homes and sellers for our buyers!

I could five agents other than the principal, Haro Setian, in that photo. That happens every day from 9 to noon, eh? Is that… strictly voluntary or could it be sort of a condition of staying on the team? All those computers and phones and headsets… do they belong to the individual agent making prospecting calls? Where do the phone numbers to dial come from?

And they all appear to be sitting in the same office….

In my view, that’s a pretty clear no-no under #3 and #5 of the Borello test. There is direction by a principal — the team leader. The team leader is providing the “instrumentalities, tools, and the place of work for the person doing the work” here. And there’s a set schedule from 9 in the morning to noon.

Furthermore, none of this activity qualifies as “regulatory compliance and consumer protection” and a team leader is not a broker.

To me, that’s an employer-employee relationship under Borello. So even with AB5 in place, agent teams in California are likely misclassifying employees as independent contractors.

When that case gets filed, by a former team member on some agent’s team claiming misclassification and wanting back pay, benefits, and unemployment insurance, it will be super interesting to see how the broker gets roped into it. Those depositions are going to be epic.

Lawyer: “So tell me, Mr. Broker — how were you fulfilling your statutory duties with an agent sitting in the team’s office three miles away who was on the Superagent’s team? Do you even know her name? Tell me about her last ten transactions please.”

Does AB5 Exemption Even Apply to Agent Teams?

In fact, I’m not even sure that AB5 and its exemption applies to agent teams. Y’all might not get the exemption at all. Why?

Because Section 10032 of the Business and Professions Code repeatedly uses the word “broker”:

(b) A real estate broker and a real estate salesperson licensed under that broker may contract between themselves as independent contractors or as employer and employee, for purposes of their legal relationship with and obligations to each other. Characterization of a relationship as either employer and employee or independent contractor for statutory purposes, including, but not limited to, withholding taxes on wages and for purposes of unemployment compensation, shall be governed by Section 650 and Sections 13000 to 13054, inclusive, of the Unemployment Insurance Code. For purposes of workers compensation the characterization of the relationship shall be governed by Section 3200, and following, of the Labor Code.

It doesn’t say anything about one salesperson contracting with another salesperson as employer and employee or independent contractor.

It seems entirely possible to me that the team leader, not being the supervisory broker, might fall under the Dynamex ABC test… which means all of your team members are employees. Congratulations! You can act #LIKEABOSS because you #ARETHEBOSS!

Further Speculation: The Referendum Process

What we know right now is that Uber and Lyft and the other gig economy tech giants are not taking this lying down. From Courthouse News Service:

Uber, Lyft and Doordash pledged $30 million each to support a 2020 ballot measure that would overturn the proposed law. The companies say their business models rely on gig workers to provide rides, food deliveries and other app-based services to consumers.

I imagine that they will be pulling out all the stops to win that referendum, including jacking up prices on Uber rides and notifying every rider in California, “Your fare would have been $10.90 except that AB5 forces us to charge you $32.12. Contact your state representative!” And the Uber app would have a nice and easy button to press to send a text message or some such.

We don’t know if that will work of course, but this war ain’t over yet. Just the opening battle is over.

AB5 Might Not Be the Last Word

Furthermore, the language being used by the supporters of AB5, like Gov. Newsom (D-CA) and Assemblywoman Lorena Gonzalez (D-San Diego) is… well… rather fiery and dramatic.

Gonzalez is quoted in the LA Times story above saying, “we will not in good conscience allow free-riding businesses to continue to pass their own business costs on to taxpayers and workers. It’s our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs.”

I’d be mighty curious to hear her thoughts when/if Compass does an IPO at $6.4 billion. Or if one of her constituents mentions that eXp Realty is a publicly traded company, as is Realogy with its massive company-owned brokerage operations in California. Oh, and BerkshireHathaway HomeServices is literally owned by Warren Buffett.

The labor unions who were in full support of AB5 might have lost this round, but it isn’t as if they lost any of their power in California. If anything, they gained power with AB5 since they can now go unionize all kinds of workers who used to be independent contractors but are now employees.

And Gov. Newsom in his op/ed linked to above says this:

While this step is important, we must do more to reverse the 40-year trends that have hollowed out our middle class and driven income inequality. We can do this by partnering with labor and supporting their efforts to create ways for workers to join together and speak with one voice. Across the country, unions are paving the path for new ways to organize – whether it’s the fight for a federal $15 minimum wage, organizing freelancers and contractors, or bargaining project labor agreements.

Creating new ways for workers to organize is a key component of tackling the level of inequality that undermines our entire economy and threatens our children’s future. As union membership has fallen, the share of income going to the top ten percent has skyrocketed.

Huh. Tell me more about these “new ways to organize” freelancers and contractors, Gavin. I find such concepts oh so interesting for real estate.

AB5 is a bill, soon to be law. It isn’t a Supreme Court decision. The law can be modified later, perhaps after the Uber/Lyft referendum is over and done with. Nothing says that Gonzalez can’t introduce further amendments removing some of the exemptions in 2020 or 2021.

Not Just California

Finally, it goes without saying that other states can pass similar laws as California has, with or without the exemption for real estate. As I have oft pointed out, it isn’t as if Illinois, Massachusetts, and New Jersey are enjoying all kinds of tax surpluses and wouldn’t want to get their mittens on some of the unemployment, healthcare and other payroll tax revenues.

But what makes it even more interesting in 2019 is that three of the leading Democratic candidates for President in 2020 have wholeheartedly embraced AB5 and the principle of “full employee status”.

First, it was Sen. Elizabeth Warren, who said in an op-ed earlier this month that “all Democrats need to stand up and say, without hedging, that we support AB 5 and back full employee status for gig workers.” Sen. Bernie Sanders, who has introduced a similar bill at the federal level, later gave his unequivocal endorsement. Then last week, Sen. Kamala Harris’s campaign said she supported AB 5 too.

“She supports AB5. … And she believes we need to go even further to bolster worker protections and benefits and elevate the voice of workers,” a campaign spokesperson told Vice News.

I confess I am mighty curious about this “go even further” bit. Like… how much further? Perhaps… something like eliminating exemptions carved out by powerful lobbyists?

Celebrate, But Don’t Relax Just Yet

There you have it.

I think brokers in California can pop some champagne and maybe send a case of Cristal to Joel Singer and his team at CAR for a job well done. There is no doubt that they won a big one, and against powerful opposition in the labor unions. They showed that REALTORS have political power and they flexed it hard on AB5 to get the exemption carved out.

Remember: what AB5 does is apply the older Borello test for employee status to real estate, rather than the newer Dynamex ABC test.

So, relaxing… don’t do it! Stay vigilant. And stay careful. Ask your attorney about what AB5 does and does not allow. And ask your attorney what AB5 does and does not mean for agent teams and how you might need to insulate yourself from the inevitable Borello-based lawsuit against some agent team somewhere in California.

It goes without saying that if you are an agent team leader in California, working under the statutory supervision of a broker, you might want to call your attorney and find out what you can and cannot do after AB5. Ask lots of questions about the Borello test, but also make sure to ask whether you qualify for an exemption at all. I’m not sanguine about that prospect, to be honest.


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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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2 thoughts on “On California’s New Gig Economy Law: Don’t Relax Just Yet”

  1. I’m surprised that real estate agents are exempt. They are hardly ICs, except if they are sole Brokers. Salespersons must work for their Master, and the Broker- Salesperson/Broker Associate Agreement dictates the commission to be charged. In Calif, the Broker must pay Workman’s Comp. That says something right there.

  2. So employers don’t want to pay the matching social security, disability, etc., and don’t want to do the accounting or pay a payroll company to do the accounting. States don’t want indpendent contractors because while they still get their money from the independent contractor, many contractors spend it before tax time and have trouble making the payments. Why not put some effort into making it easier to to make the payments. Get rid of the forms to file. Maybe pay the contractors through a state portal that subtracts the withholdings automatically with no paperwork. Then you’d only have ADP and paychex lobbying they legislature to protect their hyde.

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