Business Groups Plot Challenge to California Crackdown on Gig Workers

Biden has pledged to use California's law as 'model' for labor agenda

A 7-Eleven in Indio, Calif., during the COVID-19 pandemic / Getty Images
November 16, 2020

Small business advocacy organizations are suing California to overturn a controversial law that targets the gig economy—a lawsuit that could affect Joe Biden's economic agenda in the White House.

The International Franchise Association and Asian American Hotel Association are preparing to challenge California Assembly Bill 5 (AB5), a 2019 bill that limits businesses' ability to designate workers as independent contractors. The groups argue that the California regulation will hurt vulnerable populations in an economy that has already been devastated by the coronavirus pandemic. The proceedings could carry national implications, as President-elect Joe Biden endorsed similar measures in March. 

These vulnerable populations do not just include contractors striving to hold multiple jobs at once in the "gig economy" but also enterprising business owners who set up national franchise locations, according to Robert Cresanti, president of the International Franchise Association. 

"Choosing to license a brand name and invest in starting a franchise business should not mean that these entrepreneurs are treated like employees of a corporation," Cresanti said in a Monday press conference. "In fact, they are independent risk-takers, entrepreneurs, and job creators."

The new laws would treat hoteliers and other franchise owners as employees of national brands, a financial relationship desired by neither the operator nor the parent company. Asian American Hotel Association spokesman Chirag Shah said that the legislation damages the prospects of hotel owners, many of whom are recent immigrants.

"These hotels are their livelihoods," Shah said of the small-business owners. "As first, second, and now some third generation Americans, the hotel business is part of the fabric of our community … These people came to the United States as immigrants with no money, and for many English was a third or even fourth language."

On the campaign trail, Biden said AB5 would serve as a model for his economic agenda. He said a similar federal law would prevent employers from "misclassifying" workers to cut labor costs.

"Employer misclassification of 'gig economy' workers as independent contractors deprives these workers of legally mandated benefits and protections," his campaign website says. "States like California have already paved the way."

Hotelier Jyoti Sarola said the measures will only serve to weaken job opportunities for the unemployed and struggling. She noted that AB5 has already led 7-Eleven to announce that it will not seek to create new franchises in the state, potentially costing Californians jobs.

"My family has been in the business since 1957," Sarola said. "We are living our American dream … [AB5] would erode the franchise model and hurt franchise businesses across the Golden State."

The California law has already drawn opposition on Capitol Hill. House minority leader Kevin McCarthy (R., Calif.) has previously stood alongside small businesses and economists alike to prevent AB5 from taking continued effect.

"With California's shelter in place order in effect for nearly a month, it's clearer than ever that the state's AB5 policy continues to hurt gig-economy workers," McCarthy told the Washington Free Beacon in April. "Gig economy workers deserve to maintain their livelihoods throughout the duration of this pandemic and afterwards."

The legal team assembled by the organizations spoke confidently about its case against Sacramento. Cresanti said the lawsuit is a necessary step to prevent the state government from doing permanent damage to both business owners and workers.

"Fundamentally, it just shocks the conscience that this unintended consequence could actually befall someone," Cresanti said. "It just [strikes] at the very core of fairness … this is a taking by the government."

The groups are expected to file the lawsuit on Tuesday.