California's Ab5 Law: Effective From [Date]

California Assembly Bill 5 (AB5) is a piece of legislation that went into effect on January 1, 2020. It required companies that hire independent contractors to reclassify them as employees, with a few exceptions. The bill was signed into law by Governor Gavin Newsom in September 2019.

What is the ABC test?

The ABC test is a three-pronged test used to determine whether a worker is an employee or an independent contractor. It is used by employers to demonstrate that workers should not be considered employees. All workers are considered employees in the eyes of the IRS and state governments unless these criteria are met.

The ABC test is especially relevant in the gig economy, where more and more workers are moving towards freelance work. The test is becoming more and more utilized by employers, as it helps them avoid liability if a worker is hurt on the job.

The three components of the test are as follows:

Standard A

The worker performs their work outside of the direct control of the employer. For example, the worker has no set schedule, doesn't directly answer to a supervisor and isn't eligible for bonuses or compensated based on their performance.

Standard B

The work the individual performs is not part of the core offerings of the employer's business or the work performed is not conducted at the employer's location. For example, a worker who is completely remote or a person hired to perform a duty not advertised as a business service.

Standard C

The worker is typically an independent contractor for other clients. If the worker normally performs the same duties for other clients, they could be considered an independent contractor.

The ABC test was established following a legal ruling in a case heard by the California Supreme Court in 2018. The case was filed by Dynamex Operations West, Inc., which argued that companies must use the test to determine how workers should be classified.

Who is affected by AB5?

California's Assembly Bill 5 (AB5) has affected a wide range of workers and businesses, including those in the gig economy and beyond. The bill, which came into effect on January 1, 2020, was designed to reclassify many gig workers as employees rather than independent contractors, affording them benefits such as minimum wage, sick leave, overtime pay, and health insurance.

AB5 applies the "ABC test" to determine whether a worker is an employee or an independent contractor. The three criteria are:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
• The worker performs work that is outside the usual course of the hiring entity's business.
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

While AB5 was primarily aimed at the gig economy, with companies like Uber and Lyft in the spotlight, it has also impacted a range of other workers and industries. Here's a breakdown of who is affected:

Drivers and Delivery Workers

AB5 was designed to regulate companies that hire gig workers in large numbers, specifically targeting ride-sharing and delivery companies such as Uber, Lyft, and DoorDash. These companies were required to reclassify their contract drivers as employees, entitling them to various benefits and protections. However, this was later undone by Proposition 22, a ballot initiative backed by these companies, which reclassified their drivers as independent contractors.

Freelancers and Creative Professionals

AB5 has had unintended consequences for creative freelancers, including writers, journalists, editors, graphic designers, photographers, and musicians. While there are exemptions for these professionals, the bill's submission caps and strict criteria have led to confusion and legal challenges. Some out-of-state clients have avoided working with California-based freelancers to avoid potential non-compliance.

Businesses

AB5 affects businesses that rely on independent contractors in California, regardless of whether the business is based in the state or not. Businesses need to ensure they correctly classify their workers to avoid misclassification lawsuits. If workers are reclassified as employees, businesses may face increased costs associated with wages, benefits, and other employee entitlements, which could significantly impact their bottom line.

Exemptions

AB5 includes a long list of job categories that are exempt from its strictures. These include licensed professionals such as lawyers, accountants, physicians, dentists, psychologists, veterinarians, architects, engineers, and real estate agents. Certain business-to-business contractors and referral agencies are also exempt if they meet specific requirements.

What are the 3 prongs of the ABC test?

The ABC test is used to determine whether a worker is an employee or an independent contractor. It is currently used by the U.S. Department of Labor and 33 states, including California. The test is comprised of three prongs, which I will outline below:

Prong A: Absence of Control

The hiring entity must prove 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 performance of the work and in fact. This means that the worker sets their own schedule and works without supervision. Merely working from home is not enough to satisfy this prong—especially if the company provides materials or specific instructions for the worker to meet.

Prong B: Nature of the Business

The worker must perform work that is outside the usual course of the hiring entity's business. Contracted workers who provide services in a role comparable to that of existing employees will likely be viewed as working in the usual course of the hiring entity's business. For example, a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company.

Prong C: Customarily Engaged

The hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. The independent business operation must be in existence at the time the work is performed. The worker must have made the decision to go into business for themselves and taken the usual steps to establish and promote that independent business, such as incorporation, licensure, advertisements, and routine offerings to provide services to the public or a number of potential customers.

What are the employment protections and benefits for employees?

California Assembly Bill 5 (AB5) is a piece of legislation that came into effect on January 1, 2020. Popularly known as the gig worker bill, it required companies that hire independent contractors to reclassify them as employees.

AB5 has been modified in the years since it was signed into law, with a number of job categories now exempt, including app-based drivers. However, the bill has extended employee classification status to some gig workers.

Employment Protections and Benefits for Employees

Under AB5, employees are entitled to a range of benefits and protections, including:

• Coverage by workplace discrimination laws
• Eligibility for overtime pay
• Coverage by workers' compensation statutes
• Collection of post-termination unemployment
• Eligibility for health insurance and other employee benefits
• Minimum wage
• Business expense reimbursements
• Sick leave
• Overtime
• Disability insurance
• Unemployment insurance
• Paid sick leave
• Paid family leave
• Short-term disability insurance
• Compliance with California paycheck rules
• Compliance with California minimum wage laws, which in 2022 was $14 per hour for businesses with 25 or fewer employees and $15 per hour for businesses with more than 25 employees. On January 1, 2023, California's minimum wage increased to $15.50 for all employer sizes.
• Compliance with wage orders issued by the California Department of Industrial Relations, Industrial Welfare Commission
• Compliance with California Unemployment Insurance laws, which require employers to register with the California Employment Development Department (EDD) and pay unemployment insurance premiums
• Compliance with California Workers' Compensation Insurance laws, which require all employers with at least one employee to have workers' compensation insurance
• Compliance with California Paid Family Leave laws, which provide up to six weeks of partial pay to employees who take time off to care for a seriously ill family member or to bond with a new child entering the family

How does AB5 affect independent contractors?

California's Assembly Bill 5 (AB5) is a piece of legislation that came into effect on January 1, 2020. The bill, also known as the gig worker bill, required companies that hire independent contractors to reclassify them as employees.

AB5 has had a significant impact on independent contractors, as it has led to some of them being reclassified as employees. This reclassification means that these workers are now entitled to a range of protections and benefits that they were not previously eligible for as independent contractors. These include:

• Coverage by workplace discrimination laws
• Eligibility for overtime pay
• Coverage by workers' compensation statutes
• Collection of post-termination unemployment
• Eligibility for health insurance and other employee benefits
• Minimum wage
• Sick leave
• Overtime
• Disability insurance
• Unemployment insurance

However, the reclassification of independent contractors as employees also comes with potential downsides. For example, gig workers who become employees may lose the flexibility to choose when and when not to work. Additionally, the increased costs associated with reclassification may be passed on to consumers, resulting in higher prices.

To determine whether a worker is an independent contractor or an employee, AB5 codifies the "ABC test", which consists of three criteria:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
• The worker performs work that is outside the usual course of the hiring entity's business.
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

It is important to note that AB5 has faced some opposition and has been modified since its implementation, with certain job categories being exempted from its strictures. Despite this, AB5 still has a significant impact on independent contractors in California, and businesses that hire them must ensure they are compliant with the law to avoid potential litigation.

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