What is AB5?
California Assembly Bill 5 (AB5) is a law that went into effect in California on January 1, 2020. The law is intended to protect workers in the gig economy by establishing a test that determines whether an individual can be considered an independent contractor or employee.
The purpose of AB5 is to ensure that workers classified as independent contractors are not denied the protections and benefits that are afforded to employees, such as overtime pay, minimum wage requirements, and workers’ compensation.
The law has been the subject of much controversy and legal challenges, and its provisions have been modified or exempted for certain industries or occupations. If you have questions about how AB5 may affect your employment status or rights, you should seek legal advice.
AB5 Test and Exemptions
Under AB5, all workers are classified as employees by default. To be considered an independent contractor, the hiring must be able to demonstrate that a worker meets all of these criteria:
- The worker is not subject to the hiring entity’s direction and control in terms of how they perform the work.
- The worker performs tasks that fall outside the normal business scope of the hiring organization.
- The worker is independently engaged in an established business, trade, or occupation directly related to the work being performed.
The hiring entity has the burden of proof to classify a worker as an independent contractor, rather than an employee. If the hiring entity cannot demonstrate that the worker meets all of these criteria, the worker will be regarded as an employee and will be entitled to the protections and benefits that are afforded to employees, including minimum wage, overtime pay, and workers’ compensation.
The law has several exemptions that apply to certain industries or occupations, which means that workers in those industries or occupations may be classified as independent contractors even if they do not meet all of the criteria set out in AB 5. Some of the exemptions to AB 5 include:
- Certain licensed professionals, such as doctors, dentists, lawyers, and architects.
- Real estate agents and brokers.
- Certain types of freelance writers, photographers, and artists.
- Business-to-business contractors.
- Certain types of insurance agents.
- Certain types of marketing professionals.
The Potential Consequences of AB5
AB5 has the potential to have significant consequences for workforce management in California. The law has had an impact on the gig economy and businesses, particularly in industries that rely on independent contractors – for example, ride-hailing and delivery services.
For workers, the main consequence of AB5 is that they may be entitled to the protections and benefits that are afforded to employees if they are classified as employees rather than independent contractors. These protections and benefits include minimum wage, overtime pay, workers’ compensation, and unemployment insurance. If a person is initially classified as an independent contractor and is later found to be an employee, they may be able to recover unpaid wages and benefits.
For employers, the main consequence of AB5 is that they may be required to pay additional wages and benefits to workers who are classified as employees rather than independent contractors. This may increase their labor costs and may also expose them to legal liability if they fail to comply with the law. Employers who misclassify workers as independent contractors may also be subject to penalties and fines.
How AB5 Will Affect Your Business?
California Assembly Bill 5 makes it significantly harder for businesses to classify workers as independent contractors instead of salaried employees. One of the main impacts of AB5 on businesses is the so-called “ABC test,” which has been codified into California law. The California Supreme Court ruled that it is the appropriate test to use in determining whether a person is an independent contractor or employee.
Another potential impact of AB5 on businesses is the risk of audits and penalties. If a business misclassifies an individual as an independent contractor, it may be subject to audit by the California Employment Development Department (EDD) or other government agencies. The EDD has the authority to assess penalties and fines against businesses that misclassify workers, and it may also require businesses to pay back taxes and other unpaid benefits to workers who were misclassified.
There are a few ways that businesses can respond to the law:
- Ensure compliance with AB5: Reclassify any workers who do not meet the criteria for being an independent contractor as employees. This may involve incurring additional labor costs, such as paying minimum wage, overtime pay, and providing benefits to these workers.
- Seek an exemption: Another option for businesses is to seek an exemption from AB5 for certain types of workers or industries.
- Challenge AB5: Some businesses have challenged AB 5 in court, arguing that it is unconstitutional or that it unfairly burdens their industry. These challenges have had mixed results, and it is not clear how they will ultimately be resolved.
- Adjust the business model: Businesses may need to adjust to comply with AB5. For example, a business that relies on independent contractors may consider hiring employees or restructuring its operations in order to meet the criteria for classifying workers as independent contractors.
Independent contractors and employers in other states should be careful because they may be subject to similar laws and regulations as those in California.
Conclusion
In conclusion, California Assembly Bill 5 established a test to determine whether a worker is an employee or an independent contractor. The law has had a significant impact on businesses in California, particularly those that rely on independent contractors.
It is important for businesses to understand the implications of AB5 and to consider their options for responding to the law, such as complying with it, seeking an exemption, challenging it in court, or adjusting their business model. If you have questions about how AB 5 may affect your business, you should seek legal advice.
Author Bio: Gilad David Maayan
Gilad David Maayan is a technology writer who has worked with over 150 technology companies including SAP, Imperva, Samsung NEXT, NetApp and Check Point, producing technical and thought leadership content that elucidates technical solutions for developers and IT leadership. Today he heads Agile SEO, the leading marketing agency in the technology industry.
