New California Law for Employees vs. Independent Contractors

Posted by Mohsen Parsa | Dec 12, 2019 | 0Comments

The new employee versus independent contractor law is here and about to take effect. This bill is better known as Assembly Bill No. 5 (AB 5), and here's an overview of what you should know about it if you do business in California.

What is California's AB 5?

California's AB 5 is legislation that was signed into law on September 18, 2019, by Governor Newsom. It takes effect on January 1, 2020, and will have a deep impact on businesses with respect to independent contractors.

The law codifies what's known as the ABC test used to determine when a person in California is, in fact, an independent contractor versus an employee. This test was outlined in the California Supreme Court decision of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018). According to the ABC test, to be classified as an independent contractor, three criteria must be satisfied:

  1. in the performance of his or her work, the worker must be free from the control and direction of the hiring entity;
  2. the worker must perform work outside the usual course of the hiring entity's business; and
  3. the worker must customarily engage in an independently established trade, occupation, or business of the same nature of the work performed.

In Dynamex, this test applied only to California's wage orders. Now, however, the test applies to workers under the California Labor Code and the Unemployment Insurance Code.

AB 5 also affects companies doing business in California – specifically any company that hires a worker in the State of California will be required to adhere to this law come January 1, 2020.  

Why does AB 5 matter?

The classification of workers as independent contractors has benefited companies over the years because they are not required by law to compensate contractors with things like:

  • a minimum wage
  • rest breaks
  • expense reimbursements
  • vacation time
  • sick leave
  • health insurance
  • unemployment insurance
  • other employee benefits.

As such, companies may have a preference to hire workers as independent contractors even when they should really be classified as employees. Independent contract workers enjoy fewer benefits than their employee-classified counterparts who may be doing the exact same job under the exact same work requirements and conditions.

In this regard, AB 5 matters for two basic reasons:

  1. it is designed to make sure workers receive the kind of work-related benefits they should receive for the work they do; but
  2. it also puts a burden on employers to make sure they classify workers according to the new law.

Though the law is meant to protect workers, it does offer one inconvenience: contract workers often work as independent contractors because they like, want, or need the flexibility that contract work provides. Some critics of the law say that workers will lose this flexibility. This is especially true for "gig" workers.

There are, however, many exemptions to the law, and there may be more as more companies apply for exemptions (e.g., ride-sharing companies that hire "gig" workers like DoorDash, Uber, and Lyft are applying for exemptions). The current exempt professions and types of businesses include but are not limited to:

  • insurance agents;
  • attorneys;
  • real estate agents; and
  • some business-to-business contractors and referral agencies.

Who Should You Contact with Questions about California's AB 5?

If you hire independent contractors or are currently an independent contractor in California and have questions about AB 5, contact Mohsen Parsa, Inc. We are a professional law corporation that provides legal services in the practice areas of startupsbusiness lawentertainment, and employment law. We can help make sure you either designate workers properly or are designated properly as a worker.

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