Independent contractor law: what to know about California's AB5

Update: There are new rules as of 2021, which you can view in our article about independent contractor laws. On September 19, 2019, California Gov. Gavin Newsom signed Assembly Bill 5 into law. The legislation—which is also known as the “gig worker bill”—limits employers’ use of independent contractors in the gig economy. 

The new independent contractor law is aimed at protecting employees of companies that hire a large number of gig workers such as Uber, Lyft, and Postmates. However, it will also largely impact California employers across several industries. The law took effect on January 1, 2020. Let’s take a look at what it means, as well as how it impacts both California employers and workers. 

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What is California Assembly Bill 5?  

AB5 is an independent contractor law that requires employers who hire independent contractors to reclassify them as employees if the work performed does not pass a three-pronged test. The law is an expansion of a 2018 California Supreme Court ruling made in the Dynamex Operations West, Inc. vs. Superior Court of Los Angeles case.

In the court case, California Supreme Court judges ruled that employers must use a three-pronged test when determining whether or not to classify workers as employees or independent contractors. AB5 simply codifies the test and expands its application beyond California’s Wage Orders.The worker must be classified as an employee if the employer cannot prove the following things:

1. The worker can perform services free from the control or direction of the employer.
2. The worker’s tasks are outside of the “usual course” of the business’s activities.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The new independent contractor law holds employers to a higher standard when it comes to proving employees are independent contractors. But what impact does the legislation have on both business owners and workers? Let’s take a look at the advantages and disadvantages of AB5.

What does this mean for employers?

Many industries will feel the impact of California AB5, but more than 50 industries and professions are exempt from the law. This includes attorneys, real estate agents, doctors, hair stylists, and some business-to-business contractors and referral agencies. Non-exempt employers must ensure they are not violating the law by taking a closer look at how they classify their staff members.

For employers who must reclassify their group of gig workers to employees, they will have to prioritize cost the highest. The introduction of required minimum wage, paid time off, and insurance could significantly impact a business's bottom line. Furthermore, there are serious implications for violating AB5. Labor Code section 226.8 stipulates that employers who are guilty of a “willful misclassification” can be subject to civil penalties of $5,000 to $15,000 for each violation.

What about the workers?

The biggest impact the independent contractor law has on workers is the obvious one—it will turn hundreds of thousands of contract gig workers into bonafide employees. This means you must pay them at least minimum wage, and give them the same benefits as other employees.

A potential disadvantage to the law is that it may require businesses to follow the same work performance standards. This means, for example, that ride-hailing or delivery drivers may not get to enjoy the flexibility of when and where they work like they have in the past.

Need help applying these laws to your business?

Check out our HR and Compliance services to see how Homebase can help you understand and make it easier to follow state and federal employment legislation. Remember this is not official legal advice. If you have any concerns about minimum wage laws, it’s best to consult an employment lawyer.