How AB5 is Affecting California Employers

A new California law is reclassifying independent contractors causing a shakeup with major gig companies who are refusing to change their workers’ status. Assembly Bill 5 was signed back in September by Governor Gavin Newson and went into effect at the beginning of the year.  

Under the new law, the criteria for determining whether a worker is an independent contractor or an employee has changed. There will now be a new test to determine whether a worker will remain an independent contractor, or become an employee, which comes with more protections and benefits, such as minimum wage, paid sick time off, and health insurance. 

Workers will only be labeled independent contractors if they fulfill the following elements of the new “ABC” test:

• A 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.
• A worker performs work outside of the usual course of the company’s business.
• A worker is engaged in an independently established trade, occupation or business of the same nature as the work performed.

There are exempt occupations, which have to pass a separate test called the Borello test to remain exempt by AB5.

The bill was first introduced back in 2018 after a lawsuit was brought against Dynamex Operaions West, Inc. a nationwide package and document delivery company. The claim accused the company of wrongfully classifying its workers as independent contractors. Ultimately, the claim against Dynamex catapulted AB5 into recognition by the California senate. 

Misclassification of an employee can be a serious problem if an employer deliberately misclassifies employees in an effort to cut costs, leaving workers without benefits they deserve. Misclassification lawsuits can be brought by individuals or groups in class-action lawsuits. Despite the passing of the law, companies sprung into action given the effect it might have on their business.

Gig Companies Are Now Suing

Major gig companies like Uber, Lyft, and food delivery services are the most affected by this bill since their business model relies heavily on independent contractors. Uber has already filed a lawsuit against the bill, refusing to change their workers’ statuses. The complaint, which also includes other tech companies like Postmates and current drivers, claims the Bill violates U.S. and California constitution. According to a Postmate’s driver, the bill is “threatening the freedom and flexibility to support my family”. This is in reference to the flexibility that comes with working for a gig company, you can make your own hours and schedule. As an employee, you get benefits but you lose the ability to work whenever you want.

In addition to these changes, employers’ bottom line is also being affected. It is more financially beneficial to hire an independent contractor, due to the costs associated with an employee. According to Forbes, these costs will inevitably be passed down to the consumer. It could also mean that workers may lose their jobs if companies can’t afford to convert them into employees. 

What Do Supporters Say?

Supporters of the bill say it is a much needed change for independent workers since gig companies have grown exponentially in the past decade. In an op-ed Governor Gavin Newsom said our economy has “stopped working for working people, and while the wealthier get richer, working people have grown poorer”. This is why he signed this bill into law because companies get to save on labor costs by identifying workers as “independent contractors”. Before this bill, employers didn’t have to be responsible for the cost of workers’ compensation and unemployment insurance. Now, they must figure out if workers fall into the category of an employee, changing their entire employment system, and offer important benefits for their workers. 

Who is Exempt from AB 5?

The following occupations do not fall under AB 5 including;

• Doctors 
• Professionals (lawyers, architects, engineers)
• Professional services (marketing, human resources, travel agents, graphic designers)
• Financial services (accountants, investment advisors)
• Real Estate Agents
• Insurance brokers
• Contractors
• Freelance writers
• Hairstylists

Occupations Covered by AB5

The following occupations are now covered by AB5. In the past, these workers were commonly treated as independent contractors.

• Truck drivers
• Rideshare (delivery workers)
• Janitors & Housekeepers
• Health care professionals
• Health Aids
• Performers and other entertainment professionals
• Landscape architects
• Exotic dancers
• Rabbis and other clergy
• Campaign workers
• Language interpreters

What happens now?

Companies that have independent contractors are now examining how the framework of AB5 affects them. They must run the new ABC test on existing workers or the Borello test if they have independent contractors with an exempt occupation. Experts also say employers must keep monitoring how courts are interpreting the new test to make sure they are not at risk of possible lawsuits. Just two months into the year, the law has already had an effect on some companies, for example, SB Nation, a sports blogging network owned by Vox Media, are dropping 200 contractors as a part of the fallout with the law. 

New York and New Jersey are currently looking at AB5 as a model for possible future legislation, it remains to be seen what major effects this law will have by the end of 2020.