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 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.
What is California Assembly Bill 5?
AB5 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 workers should be classified 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:
- The worker can perform services free from the control or direction of the employer.
- The worker’s tasks are outside of the “usual course” of the business’s activities.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under the new law, employers are held to a higher standard when proving their 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, cost will be the largest impact. The bottom line of a business could be significantly impacted due to the introduction of required minimum wage, paid time off, and insurance.
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 AB5 has on workers is the obvious one—it will turn hundreds of thousands of contract gig workers into bonafide employees. This means they must be paid at least minimum wage, and are legally entitled to the same benefits and are essentially on a level playing field as other employees.
A potential disadvantage to the law is that since the reclassified gig workers are now on the same level as regular employees, they may be expected to follow the same standards in connection with the performance of their work. 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.