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The New AB5 Law And The Gig Economy

Employers are once again bracing themselves for what has become commonly known as the “gig worker bill” and has taken effect as of the start of this new year of 2020.  The intent of the bill is to extend to independent contractors the rights, benefits, and protections which currently are only available to employees. In short, employers are now forced again to revisit their worker classifications to make sure they are correct and to avoid any potential liability.  

Initially, the case which set the new rules for classification is Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018). Now, AB5 codifies this landmark case. Subsequently, California’s Supreme Court has placed into legislation the rigorous, three-pronged ABC Test which must be used to determine worker classification in wage-order claims, and a company must satisfy all 3 criteria to prove someone is an independent contractor.

What happens if a company is found misclassifying its workers? The California State Labor and Workforce Development Agency has the power to fine companies $5,000 to $25,000 per violation and allows the state Labor Commissioner to assess additional civil and liquidated damages. Additionally, the Employment Development Department (EDD) can audit you and reclassify your workers based on this law, which could lead to further taxes and penalties. Therefore, it is vital that you classify your workers correctly when making hiring decisions.  

ABC Test And The Standards For Decision

The main provision of AB5 requires businesses to use a three-part ABC Test to determine if a worker is an employee or an independent contractor.  Most importantly, a worker is considered an employee unless the business can demonstrate that the worker meets all three conditions of the test:

  • The worker is free from the control and direction of the hirer in connection with the performance of the work, practically and in the contractual agreement between the parties.
  • The worker performs work that is outside the usual course of the hiring entity’s business.
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity/company.

This stricter standard of classification will make it extremely hard for most companies to meet all three of the above criteria.  The two companies that will be impacted considerably by AB5 are Uber and Lyft, and both companies have begun an extensive lobbying effort to curtail this new California enactment.  Their goal is to overturn the law in a November ballot initiative, and are also trying to fight the law as unconstitutional. What is known is that nearly 2 million independent contractors may be impacted along with their hiring agencies.

What’s Ahead With AB5

Once independent contractors are classified as employees they then become entitled to a minimum wage, workers’ compensation, unemployment insurance, expense reimbursement, paid sick leave and paid family leave, and opportunity to join a union. Although that is burdensome, if the EDD audits your business and reclassifies the independent contractors as employees then it could be even worse. Therefore, coming to the decision of whether or not you have an employee or independent contractor may warrant consultation with expert law professionals.  

Your bottom line can be affected tremendously by just following the usual protocol when hiring now that the rules landscape has changed. Classifying a worker based on this new standard can be hard to navigate, especially because the EDD may be more aggressive in trying to apply this standard in the beginning. The attorneys at Dallo Law Group are ready to help guide you through the difficult process to ensure the best chances for the future of your business.  Reach out to us soon for a free consultation: 619-795-8000.