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What you should know about California’s new law AB5

On September 18, 2019, California Governor Gavin Newsom signed into law a piece of legislation—AB5—that could potentially reclassify millions of independent contractors as employees and dramatically reshape the future of independent workforces in California and beyond. Taking effect on January 1, 2020, AB5 is further clarification of California’s 2018 Supreme Court case, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles (4 Cal.5th 903).

Also known as the “gig worker bill,” the discussion around AB5 has focused on its effects on the Ubers and Lyfts of the world; however, it is far more significant than that. A standard quote that holds true is “as California goes, so goes the nation.” With this, AB5 has the potential to touch nearly all companies in the United States.

With the state of panic and confusion, slowly setting into some business owners, here is some information that can help you take some proactive steps in a post-AB5 economy.

History of AB5

AB5 codifies the landmark April 2018 decision in the Dynamex case. In brief, this case documented drivers of a delivery company called Dynamex Operations West were seeking employment status from the company. The drivers for this delivery service argued that they were required to wear the company’s uniform and display its logo, while providing their own vehicles and shouldering all the costs associated with the deliveries, and thus should be classified as employees, not independent contractors. With this decision, California’s Supreme Court determined that the rigorous, three-pronged “ABC Test” must be used to determine worker classification in wage-order claims.

ABC’s of the Gig Economy

AB5 presumes a worker is an employee unless the hiring business proves the worker is an independent contractor using a 3-part A-B-C test. AB 5 adopts the restrictive test for independent contractor status imposed by the California Supreme Court in its April 2018 Dynamex decision. Dynamex created a presumption that a worker is an employee, not an independent contractor, for purposes of minimum wage, overtime, and meal/rest period compliance, unless the hiring entity can establish all the requirements from the A-B-C test.

The A-B-C test is designed to simplify independent contractor determination and discourage independent contractor status. If the employer fails any one of the follow three parts, the worker is an employee.

· (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the production of such work

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

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

Who is exempt from AB5-and who isn’t?

With writing this decision into law, the state of California will close all loopholes that enabled years of misclassification of employees. AB5 allows the state to enforce a stricter standard for freelancers.

Industries impacted by AB5 would include:

Rideshare & delivery services, truck drivers, janitors & housekeepers, health aides, newspaper carriers, unlicensed manicurists, land surveyors, landscape architects, geologists, campaign workers, language interpreters, strippers, rabbis

However, it does offer exemptions for specific industries. 

Among the industries that are exempt are:

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.

AB5 also exempts business-to-business contractors that meet 12 specific requirements and referral agencies that meet ten specific requirements. These requirements keeps the door open for establishing a sound business-to-business relationship between referral agencies and independent contractors, but also requires a deliberately planned strategy to achieve compliance with all of the various requirements.

Exemption from AB5 does not mean that workers can automatically be classified as independent contractors by magic. Instead, it means the former Borello test will be used to determine their classification for both wage-order and non-wage-order claims. So structuring and documenting the independent contractor arrangement to comply with the multi-factor test is crucial for exempt businesses.

Employee Protections

The signing of California AB5 into law affects many, but not all, businesses that rely on gig workers in California. Companies that are not exempt will have to take a closer look at how they classify employees and independent contractors to ensure that they’re not violating the terms of AB5

For companies that do reclassify gig workers as employees, the question of how easy the transition will be centered around cost.

Being classified as an employee guarantees a worker a range of benefits and protections that are not offered to independent contractors. Being classified as an employee now requires companies to pay a minimum wage, offer paid time off and health insurance, pay unemployment insurance, and worker’s compensation benefits for these new-found employees. These new-found costs could have a significant impact on a company’s bottom line.

These additional costs of hiring workers as employees instead of independent contractors may lead companies to impose limitations, such as limiting the number of workers active at a given time or limiting hours to prevent full-time employment, in turn, limiting mandated health insurance coverage or overtime payments.

Are there implications outside of California?

It is possible that the passage of AB5 could start an A-B-C Test trend and expand to not only other states but also different claim types. Because California’s economy is the largest in the United States, legal and political developments often tend to have a ripple effect across other states and federal levels.

Though it may take some time for any new legislation to be passed, it is possible that similar bills will begin to start popping up. Businesses operating outside of California should be proactive in enabling the proper independent contractor processes and relationships now. Planning, not panicking is the most helpful thing to do at this moment, the sooner your company has their ducks in a row, the better.

Effective date and next steps

AB5 becomes effective on January 1, 2020. However, the ABC test, and its applicability to claims by or on behalf of misclassified contractors for minimum wage, overtime, and meal/rest violations, has been the law of the land for around 18 months through the Dynamex decision.  

In the meantime, the enactment of AB 5 is a wake-up call for businesses to examine/re-examine their contractor classifications carefully. If you operate in California, it’s a good idea to start acting now. If you operate outside of California, you have more time, but taking the necessary steps now could save you some headaches.

Not sure what steps to take?

1. Get the right legal counsel. Consult an attorney that has a full grasp of the nuances that comes with independent contractors and employment laws

2. Assess your risk. Conduct an audit of your independent contractor management processes. Every touchpoint with an independent contractor is relevant to help you and your business understand what is and isn’t complaint

3. Leverage Technology. You’ll want a platform provider that can help you with the risk assessment in step 2, but also provide guidance on and implement best practices specific to your industry.

This material has been prepared for informational purposes only and is not intended to provide and should not be relied upon for legal advice. If you have any legal questions regarding this content or related issues, then you should consult with your professional legal advisor.

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Disclaimer: The information and resources provided herein are not a substitute for experienced legal counsel and does not constitute legal advice or attempt to address the numerous factual issues that inevitably arise in any employment-related dispute. Although this information attempts to cover some major recent developments, it is not all-inclusive, and any recommendations are based upon HR best practices and procedures. We recommend you consult an attorney for legal guidance.

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