Cindy Sarpomaa-Nyarko

Associate Editor 

Loyola University Chicago, School of Law JD 2026

In 2019, the Governor of California signed Assembly Bill 5 (AB 5) into law.  This bill sparked a battle in the courts between California’s state attorneys and rideshare giants, Uber and Lyft, who are determined to maintain the independent contractor classification of their workers. However, the new issuance of a DOL rule could change the landscape of this classification battle, not just for rideshare workers, but workers in many industries within the gig economy who could benefit from the new rule.

The classification battle: independent contractors vs. employees

AB 5 adopted the ABC test to determine if workers in California are considered independent contractors or traditional employees under the California Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission. The ABC test established that a worker in California is considered an employee and not an independent contractor if the employer satisfies three conditions:

• 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;
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Despite the implementation of the bill, major rideshare companies like Uber and Lyft, as well as other companies who participate in the gig economy resisted AB 5 and the reclassification of their workers from independent contractors to employees. As a result, California’s attorney general and other city attorneys in the state brought suit against Uber and Lyft in 2020 for violation of AB 5. The attorney general and other labor advocates maintained the position that Uber, Lyft, and other app-based companies have misclassified their workers as independent contractors and doing so has denied these workers employee benefits and protections. It is the position of Uber, Lyft, and many other app-based companies that being classified as independent contractors allows their workers to continue to take advantage of the flexibility and freedom of their work.

In response to the 2020 suit and corresponding injunction requiring Uber and Lyft to reclassify their workers, Uber, Lyft, and other app-based companies funded a ballot initiative in 2020 known as Proposition 22. Proposition 22 (Prop. 22) provides an exemption to AB 5 granting app-based drivers to be classified as independent contractors. While drivers would maintain independent contractor status under Prop. 22, companies would provide their drivers certain minimum wages, healthcare subsidies, accident insurance, and implement new anti-discrimination and sexual harassment policies. After the ballot initiative passed with about 60% of Californian votes, a judge of the California Superior Court ruled the ballot initiative was unconstitutional in 2021. Recently, this decision was overturned after Uber and Lyft appealed the ruling, so the exemption of Prop. 22 remains. However, a new rule was issued by the Department of Labor (DOL) in January 2024 and became effective in March 2024 to provide guidance on classifying independent contractors and employees under the FLSA. This rule may change the status quo in this ongoing battle between gig economy companies and labor advocates on the classification of workers.

DOL weighs in on the debate

In its 2024 rule, the DOL asserted that an independent contractor “refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.” In addition, the final rule applies a six factor economics reality test to analyze employee or independent contractor status under the FLSA:

• opportunity for profit or loss depending on managerial skill;
• investments by the worker and the potential employer;
• degree of permanence of the work relationship;
• nature and degree of control;
• extent to which the work performed is an integral part of the potential employer’s business; and
• skill and initiative.

The new rule differs from its 2021 predecessor that utilized a “two cores” factor test which heavily weighed only two of the six factors of the economics reality test. The DOL has stressed the purpose of this new rule is to reduce the risk that employees are misclassified as independent contractors and deprived of the protections and benefits of an employee under FLSA.

Responding to the DOL rule

Presently, rideshare companies believe that the new DOL rule will not impact the status quo for rideshare workers. Uber has also emphasized repeatedly that it is not just the rideshare companies that want to maintain independent contractor status through initiatives like Prop. 22 but many Uber drivers also support the initiative. Conversely, the Chamber of Commerce challenged the new rule arguing that it is biased and will expand the classification of workers as employees while causing businesses to fall out of compliance.

While the arguments of rideshare companies and the Chamber of Commerce are sound, the app-based driving and delivery industry is only one area in the gig economy. Many labor groups have placed special focus on industries like construction, that are adversely affected by being misclassified as independent contractors. For example, Illinois Economic Policy Institute (IEPI) emphasized in their public comment that the new rule could provide protections for construction workers whose rampant misclassification often leads to wage theft, payroll fraud, and overtime violations. App-based services have become the face of the gig economy and the classification debate. However, the gig economy is not limited to just the interests of rideshare companies. It would be a disservice to other industries if the enforcement of the new rule failed due to the lobbying of one sector of the gig economy. It will become increasingly more important to monitor how each industry in the gig economy responds to this new rule.