Know the Law: Assembly Bill 5 (AB5)

What is the AB5?

According to the California Department of Industrial Relations (DIR), “AB 5 is a bill the Governor signed into law in September 2019 addressing employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.”

This new bill imposes stricter rules that employers must follow when classifying workers in the state of California as independent contractors. An independent contractor would classify as a person or entity performing a job for an outside company without being on their payroll or receiving the benefits of an actual employee. California law states that independent contractors cannot and are not entitled to worker’s compensation, overtime pay, minimum wage, or employee wages.

There are two primary focuses of the AB5 bill. The first is to reclassify independent contractors as employees and allow them to receive benefits and protection. Second, to prevent companies from misclassifying their workers and to avoid tax evasion. Before we get into the requirements of what classifies an independent contractor under AB5, it is important to point out that a three-prong test called the ABC test is needed.

What is the ABC Test?

According to CA.gov, under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  • The 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;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Let us take a look at some of the positives that AB5 offers.

For the workers misclassified as independent contractors as opposed to employees. It allows them now to be recognized or hired as company employees who directly benefit from minimum wage, worker’s compensation, paid sick and family leave, and most importantly, unemployment insurance gaining that sense of job security we all seek. In addition, companies will have a much more difficult time misclassifying an employee as an independent contractor to avoid certain payment obligations to the state, such as payroll taxes, social security, and disability insurance, among others.

Now let us look at the negative aspects of AB5.

Voluntary independent contractors will no longer have the flexibility of choosing their business hours of operation, and Employers will lose the affordable labor that comes with hiring independent contractors. AB5 is suppressing the job growth that voluntary self-work is creating. As mentioned, many people choose to be independent contractors due to the independence and flexible schedule it gives them. Although AB5 does not apply to all work, it still prevents many other people from working small gigs to get extra income.

AB5 is currently receiving a lot of backlash from freelance “gig” workers such as drivers, attorneys, salespeople, accountants, hairdressers, doctors, architects, graphic designers, tutors, performers, and freelance writers.

Labor unions fought to pass AB5 as a way for workers to get the benefits and compensations that are due to them. As AB5 impacts business owners and employers throughout California, class action lawsuits are on the rise. One industry hit hardest by this law is the trucking industry. According to an article in Coyote Logistics, “Currently, 70,000 owner-operators are driving in California who are affected by AB5.”

In June of 2022, the Supreme Court denied hearing two lawsuits brought by the trucking industry that could have overturned AB5. Many independent contractors are finding ways to work with the law by getting business licenses, going to work for companies that still allow them to work from home or on their own schedule, or relocating their base address as is the case for many truckers.

The controversies surrounding AB5 became so intense that, on Sept. 4, 2020, the California legislature passed—and Governor Gavin Newsom signed—Assembly Bill 2257, which went into effect immediately and rewrote a number of the requirements of AB5.

Prop 22 essentially overrode AB5 on the question of whether app-based drivers are employees or independent contractors. However, on Aug. 20, 2021, Alameda County Superior Court Judge Frank Roesch ruled that two sections of Proposition 22 were unconstitutional and that the measure as a whole was unenforceable.

Uber and Lyft announced they would appeal, and Prop 22 remains in effect as the court battles continue.

For more information go to: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5