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Why California Assembly Bill 5 (AB5) Affects Everyone

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If you are a gig worker, then you know all too well the void you feel when you’re “in-between” gigs and the exhilaration that follows when you land your next assignment. It’s almost like being on a trapeze, but without the safety net below.

But, despite its ups and downs, you wouldn’t trade it in for a corporate nine to five job. The gig economy makes up roughly 40% of American workers and is a fast-growing segment with more and more corporates embracing the crowd-sourcing culture as it were.

However, if you’re an independent contractor, project-based worker, freelancer, part-time worker, or temporary hire in California, how does the AB5 Bill affect you? Can you get the best of both worlds? If you own a business whose foundation is built on independent on-demand labor, what does the future hold for you? Here’s why California Assembly Bill 5 affects everyone.

What Is AB5

The California Assembly Bill 5 or AB5 for short is a controversial piece of legislation that was signed into law on September 18, 2019, by California Governor Gavin Newsom. It effectively reclassifies independent contractors as employees reshaping the future of gig workers in California and potentially other states if they decide to follow suit.

Additionally, because of the way it is written, its effects extend to companies that aren’t based in California but contract independent contractors from the state. This includes those who cross into California even temporarily.

Before the herculean task of restructuring the entire Californian workforce sets in, the Supreme Court ruled that the “ABC Test” has to be used to classify workers in wage-order claims. The whole premise behind the ABC Test is to lay the burden of proof squarely on the shoulders of the hiring company to show that an employee is an independent contractor.

For a company to do this, it has to satisfy all three criteria of the ABC test. That is, a worker is classified as an independent contractor if:

A. The worker is free from any form of direction or control in the performance or delivery of their services

B. The worker performs their duties, assignments, projects or tasks outside the usual scope of business the hiring company

C. The worker is customarily contracted in an independently established business, occupation, or trade whose nature of work is similar to that of the hiring company

The scope of these new California laws 2020 definitions of an independent contractor is a lot more restrictive than the Borello test, which was the standard previously adopted in the state.

It made it much easier to classify workers as independent contractors. The ABC Test is now embedded into law and extends beyond wage-order claims to all the state Labor and Unemployment Insurance provisions.

Enforcement of AB5

How AB5 will be enforced is the ultimate billion-dollar question. As is the case with all new laws that have no set precedent in the judicial system, there will likely be a significant gap between what is provided for in law and how the courts interpret it.

As it currently stands, a vast majority of state agencies oversee worker classification only when it pertains to wage-order claims made by individuals. But, this could be the gateway to larger agency audits into hiring companies’ worker classification. Such audits will likely use the ABC Test to determine what constitutes “improper” classification.

The law gives the California State Attorney General, local prosecutors, and city lawyers the leeway to file lawsuits against companies that violate this law. This will likely trigger long-drawn-out legal battles with companies that can afford to flex their financial muscles as they work hard to fight orders requiring them to reclassify their workers.

The litmus test, however, has everything to do with how the courts interpret AB5, and so far, the California Supreme Court is yet to apply the ABC Test in any single case that has been presented to them. So, as it stands, interpretation of that law remains in limbo. It is, however, entirely possible that the courts will interpret the AB5 law in such a way that some companies are allowed to classify workers as independent contractors.

AB5 Exemptions

Before the bill was signed into law, AB5 was the subject of major lobbying efforts from interest groups who sat on opposite sides of the fence. The result? More than four dozen different types of businesses and professions that managed to exempt themselves from this law.

They include insurance agents, dentists, doctors, accountants, lawyers, hairstylists, real estate agents, and various creative professionals. In addition to this, the law also exempts referral agencies that meet 10 very specific requirements, as well as business-to-business (B2B) contractors that meet a list of 12 very specific requirements.

Referral Agencies

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For referral agencies to be classified as independent contractors, they need to:

  • Be free from the hiring firm’s direction and control while providing their services
  • Have all required business tax registration documentation and licenses
  • Have the required State Contractor’s License if the nature of work of the client requires it
  • Deliver services to the client under their (service provider’s) name rather than that of the referral agency
  • Provide their vehicles, equipment and any other tools required to deliver their services
  • Be customarily contracted in an independently established business, occupation, or trade that is similar to the work performed for the client
  • Contract with other clients to provide similar services and maintain clientele without any restrictions from the referral agency
  • Set their terms of engagement, working schedule and can accept/reject clients and contracts
  • Set their rates without any deduction from the referral agency
  • Not be penalized for rejecting clients and contracts

B2C Contractors

For B2B service providers to be classified as independent contractors, they need to:

  • Be free from the hiring firm’s direction and control while providing their services
  • Provide services directly to the hiring firm rather than its customers
  • Have a written contract
  • Have all required business tax registration documentation and licenses
  • Maintain a separate business location from that of the hiring firm
  • Be customarily contracted in an independently established business, occupation, or trade that is similar to the work performed for the hiring firm
  • Contract with other businesses to provide similar services and maintain clientele without any restrictions from the hiring firm
  • Advertise and promote themselves out to the public as available to provide similar services
  • Provide their vehicles, equipment and any other tools required to deliver their services
  • Negotiate their rates
  • Be consistent with the nature of the services provided, set their hours and work from any location of their choosing
  • Not provide services for which a license from the Contractors State License Board is mandatory

What Does AB5 Mean for Everyone

As it currently stands, workers who are classified as independent contractors don’t enjoy the protections offered by the Fair Labor Standards Act, the Civil Rights Act, or the Americans with Disabilities Act. They’re also not entitled to the rights afforded to employees like overtime pay, minimum wage or even unemployment insurance.

The enactment of the AB5 law is a big win for independent workers. However, for tech companies whose core business model is built around contracted on-demand workers, the AB5 law means that they have to relook, restructure and reorganize their operating models, a process they claim will cost billions of dollars to do. They’ve threatened to pass these costs to consumers, so expect to pay higher rates for tech services like ride-sharing, food delivery, etc.

Critics of the legislation also warn independent contractors who are accustomed to the freedom and flexibility their work affords them, that reclassification to employee status might mean conforming to the stereotypical expectations like tighter oversight and scheduled hours.

Once the law was enacted on January 1, 2019, companies will have no choice but to comply. This increases the risk of large-scale layoffs due to the higher costs of doing business.

Uber Lawsuit

Independent contractor vs. employee – that is indeed the question in the latest lawsuits hitting the ride-sharing giant. The proposed Uber class-action lawsuit filed by Uber driver Angela McRay was the first since the contentious AB5 Bill was signed into law. In the suit, McRay accuses the company of “misclassifying” its drivers as independent contractors effectively denying them the benefits of being employees.

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She is suing for damages on behalf of California Uber drivers and seeking an injunction against compliance with the new law. She further faults Uber for publicly stating that it intends to defy the new statute and would “continue to treat drivers as independent contractors.”

As independent contractors, they’re not entitled to any benefits like paid sick days, overtime, workers’ compensation, health insurance, or Social Security. And, if that wasn’t enough Uber insurance doesn’t protect drivers in certain situations when they’re driving for the ride-sharing company.

A driver would have to look into other insurance policies like commercial or gap insurance for better coverage. The long and the short of it is, drivers lament that this system continues to perpetuate their exploitation.

In response, Uber Chief Legal Officer clarified that the new law would not automatically reclassify existing drivers as employees but would instead make it more difficult to simply call them independent contractors. He, however, made it clear that they would work towards passing the ABC Test in California.

Supporters of the AB5 law say that it would benefit long-suffering contractors who would now be entitled to coverage under overtime and minimum wage laws. They would also have access to expense reimbursements as well as health insurance, Social Security, and other benefits. In March 2019, Uber agreed to pay a $20 million-dollar settlement in a driver classification lawsuit by California and Massachusetts drivers.

AB5 Implications Outside California

If you’re outside California and wondering whether the new AB5 law affects you, the answer is – probably. In recent years approximately 20 states have enacted the ABC Test in one form or another.

However, this is usually in workers’ compensation claims for unemployment insurance. California has the largest economy compared to any other US state. As a result, any political and legal developments that take place here tend to have a ripple effect across the country and at the federal level as well.

The passage of the Bill into law is likely to trigger a domino effect that will see similar bills pop up in other states. So, businesses operating outside California should use the law as a blueprint to streamline their business processes, and independent contractor relationships to avoid a deer in headlights situation.

Steps Businesses Can Take

If you run a company in California and your business model has independent contractors at its core, now’s as good a time as any to line your ducks in a row. Remember, the law comes into effect on January 1, 2020. Here are some steps you can take:

  1. Consult with an attorney whose specialty lies in employment and independent contractor law. You need to find someone who has a full grasp of all the various options for structuring the gig-worker relationship.
  2. Assess your risk by conducting an independent audit of your independent worker management processes. This includes analyzing the terms of engagement, contractual guidelines, rate negotiations, work structure and level of control, independent contractor incorporation requirements, etc.
  3. Leverage technology. This will help you not only minimize your risk but also provide guidance on and implement industry-specific best practices. It also acts as an intermediary between your business and the independent contractor to support a B2C model while providing the tools necessary for the contractors to establish themselves as a separate business.
  4. Establish an “arm’s length” business relationship with your independent contractors. If they meet the 12 requirements set out by law, then they’ll be exempt from the ABC Test.

Good or Bad – Depends on Who You Ask

The AB5 news on the enactment of the bill is a double-edged sword that cuts both ways. Experts predict that shifting a significant number of independent contractors to an employee workforce will see the costs of doing business in California begin to rise. These will likely be passed to the consumer.

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The AB5 law, however, spells good news for independent contractors if it means they also get to enjoy the perks of being regarded as employees but with the flexibility that comes with being a flexible worker. The court’s interpretation of the law is yet to be seen.

If you have more legal questions, you can also chat now with a attorney, where you’ll be instantly connected to a lawyer who can give you legal guidance on your specific case or question.

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