On January 1, 2020, this new and very controversial California law goes into effect. Will it impact your business?
Dubbed AB-5 because it originated in the State Assembly, this landmark shift in employment policy has been catching a lot of headlines lately, but many business owners may be unprepared for the potential impact it will have as we enter the implementation phase.
What is AB-5? Simply put, it reclassifies many types of independent contractors as employees, and that is bound to open up a very large can of worms for business operators who currently use so-called ‘gig economy’ workers to staff their operations.
What began as an attempt to reign in the likes of Uber, Lyft, and DoorDash, the operations that spawned the “gig” economy moniker, ballooned into a far-reaching new law that could impact millions of California workers, many of whom prefer operating as independent contractors.
Employers and contractors sure to be impacted are in transportation, entertainment, publishing and cleaning services sector, but the law is written to include hundreds more. Excluded from the law are doctors, lawyers, real estate brokers, architects, accountants and others in the professional services sector.
So, the big question is: how do you know if your independent contractors will have to be reclassified as employees? There is a 3-part test built into the law to make that determination.
Under the so-called “ABC test,” for a worker to be classified as an independent contractor a hiring entity must first prove the following:
- (A) The worker is free from the control and direction of the hirer in connection with the performance of the work, practically and in the contractual agreement between the parties.
- (B) The worker performs work that is outside the usual course of the hiring entity’s business.
- (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity/company.
This is a pretty high bar to clear and the law authorized immediate and aggressive enforcement by the attorney general, city attorneys and local prosecutors.
The law’s proponents claim it is designed to protect worker’s rights by affording current independent contractors the same benefits as traditional employees, which include a minimum wage, workers’ compensation, expense reimbursement, unemployment insurance, along with paid sick and family leave days. Employers will also have to pay their share of customary federal Social Security and Medicare payroll taxes.
The aforementioned Uber, Lyft and DoorDash have each committed $30 million to fight the new law by putting it to a vote in November’s General Election. But, until such a proposition is passed, companies doing business in California are bound to follow AB5 to the letter.
The National Law Review, in a recent article had this to say about AB5:
“Ultimately, AB 5 dramatically shifts what services will be considered the work of independent contractors and is anticipated to shift the classification of approximately 2 million independent contractors to employees. This has major implications for employers across the state and would significantly increase the cost of doing business for many companies.”
We are not experts in employment law, but we bring this to your attention because of its potential far-reaching impact on a variety of business sectors.
If you hire independent contractors and have not yet sought legal counsel as to the potential impact of this new law on your business, now is the time to do so.