AB 5: New State Law Alters Employment Landscape

Governor Gavin Newsom has signed a bill into law that codifies a court ruling from last year that set new ground rules for what constitutes an independent contractor, and which expands on that ruling. There’s been a lot written in the media about the law, AB 5, and much of it misses the point. Some news reports have said it will spell the end of independent contractors in the state and that anyone a company hires to do a temporary job on contract must be treated as an employee.

Now that AB 5 is the law, labor laws will apply to any independent contractors who have to be reclassified as employees. That means they would be afforded all of the associated worker protections, from overtime pay and minimum wages to the right to unionize. Employers would have to cover them under their workers’ comp policies, and extend benefits to them as they do to other employees

AB 5 codifies and expands on a 2018 California Supreme Court decision that adopted a strict, three-part standard for determining whether workers should be treated as employees. Known as the “ABC test,” the standard requires firms to prove that people working for them as independent contractors meet certain standards:

The ABC Test

1. Must be free from the company’s control when they’re on the job;
2. Must be doing work that falls outside the company’s normal business; and
3. Must be operating an independent business or trade beyond the job they were hired for

The first prong aligns with the common-law test for employment and evaluates the degree of control exercised by the company over the worker. The second prong examines whether the worker can reasonably be viewed as working in the hiring company’s business. The third prong inquires whether the worker independently made the decision to go into business. The fact that the hiring company does not prohibit the worker’s engagement in such an independent business is not sufficient.

Occupations that would specifically be exempted by the bill include the following: (Please note, these occupations are only exempt from the Dynamex ABC Test, they will still be subject to the Borello Test that has been used in the past to determine if they’re in fact an independent contractor.)

• Doctors
• Some licensed professionals (lawyers, architects, engineers)
• Accountants, securities broker-dealers, investment advisors
• Real estate agents
• Direct sales (compensation must be based on actual sales)
• Builders and contractors (who work for construction firms that build major infrastructure projects and large buildings)
• Freelance writers, photographers (provided the worker contributes no more than 35 submissions to an outlet in a year)
• Hair stylists, barbers (must set their own rates and schedule)
• Estheticians, electrologists, manicurists (must be licensed)
• Tutors (must teach their own curriculum)
• AAA-affiliated tow truck drivers.

What employers should do

Legal experts recommend that employers:

• Perform a worker classification audit, and especially review all contracts with personnel.
• Determine which benefits and protections should be provided to any workers who are reclassified from independent contractor to employee (think health insurance and other benefits).
• Notify any state agencies about changes to a worker’s status.
• Discuss with your lawyer if you should also include a worker as an employee for the purposes of payroll taxes, workers’ comp, federal income tax withholding, FICA payment and withholding.

Note: Federal law remains unchanged. The IRS and National Labor Relations Board have their own independent contractor tests.