AB 5:
What You Need to Know
About the New Law

Oct 16, 2019

On September 18, 2019, California governor Gavin Newsom signed into law a contentious piece of legislation, California Assembly Bill 5 (AB 5) that could potentially reclassify millions of independent contractors (IC) as employees and make it even more difficult to classify workers as ICs. This will have an immediate effect on companies like Uber, Lyft and Doordash where many workers are fighting their classification as ICs and employee protections and benefits such as Worker’s Compensation and sick leave. Effective January 1, 2020, AB 5 will be a statutory requirement and reinforces the existing ABC test adopted in the California Supreme Court’s 2018 decision in Dynamex vs Superior Court. Under California’s interpretation of the ABC test a company must prove the following:

A. The worker is free from control and direction of the hiring company in connection with performing the work, both under contract and in fact; and

B. The worker performs work outside the usual course of the hiring entity’s business; and

C. The worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hirer. 

Critical to California’s application of this test is that the worker is considered an employee of the company and it is the company’s burden to prove or provide evidence otherwise. When workers are classified as employees, then they are eligible for workers’ compensation, unemployment and disability insurance, paid sick days and family leave.

The California bill does exempt a certain number of professions and business types from the application of this ABC test. These exemptions include a variety of creative professionals, hairstylists, real estate agents, accountants, lawyers, insurance agents, dentists and doctors, among others.

The Borello Test Still Applies

However, AB 5 exemption does not mean automatic IC classification for the exempt engagement. An exempt profession or business type still must meet the former IC classification criteria referred to as the Borello test. The principle factor of the Borello test is ‘whether the business receiving the service has the right to control the manner and means of how the worker accomplishes the expected result’ as well as the following nine additional factors:

  1. Right to discharge at will, without cause;
  2. Whether the one performing the service is engaged in a distinct occupation or business;
  3. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  4. The skill required in the particular occupation;
  5. Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  6. The length of time for which the services are to be performed;
  7. The method of payment, whether by the time or by the job;
  8. Whether or not the work is part of the regular business of the principal; and
  9. Whether or not the parties believe they are creating a relationship of employer-employee.

Ramifications for California

For a business operating in California, compliance with AB 5 should start with an immediate assessment and/or audit of independent contractor processes. Engagement guidelines, contractual terms, work structure and level of control are just a few areas to consider in preparing for the implementation of AB 5. One unintended consequence of AB 5 will be the number of ineligible workers increasing as more could be classified as employees but not meet I-9 requirements. It is estimated that ineligible workers comprise as much as 25% of the total Uber/Lyft workforce in some areas. Another is increased costs to businesses and consumers – specifically in the transportation industry as the move from an IC workforce to an employee workforce.

Conclusion

The law only affects California, though some states have already begun to adapt a similar ABC test interpretation (i.e. New Jersey, Illinois, Massachusetts) and others are likely to follow suit or enact similar laws that will make it even more challenging to classify workers as ICs. As written, AB 5 may possibly extend to companies outside of California if they are contracting ICs that cross into California – even on a limited basis. State, city and local prosecutors can sue companies over AB 5 violations, though to date the California Supreme Court has not yet applied all 3 prongs of the ABC test in any single case.

 

Shortlist Compliance Solution

Shortlist has fully adapted AB 5, as well as other recent state-level developments, into our compliance rules engine to manage clients’ IC misclassification risk. If there are any questions about AB 5 or other state or federal classification tests or regulatory news, please do not hesitate to contact Michael Matherly at michael.matherly@shortlist.co

Michael Matherly

Michael has over 20 years in procurement services related to strategic sourcing and vendor and talent management. Over the last decade, Michael has delivered IC compliance and outsourcing services to mid and large size organizations.