AB-5 and What it Means for California Employers

With the passage of AB-5 last fall, California radically redefined the employment status of almost two million gig workers and other freelancers. Some industries managed to secure exemptions, while others are scrambling to adjust. For some business owners, this means hastily making the necessary arrangements to convert their contractors into regular employees. For many contractors, this means hunting for ways to stay independent so they can remain employed. The law is expected to bring employment benefits to many, but the challenges it poses to California’s businesses and labor force in the process are only just starting to be addressed. 

ABC Test

The genesis of AB-5 lies in a 2018 case decided by the California Supreme Court, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. As a result of that case, a three-part test was created to help companies determine whether or not their workers are employees. The burden of proof is on employers to show that workers are NOT employees. If any one of the following three prongs are not satisfied, then the individual in question is an employee: 

  • The individual has significant freedom to perform work for the company outside the control and direction of the employer.
  • The worker regularly performs work tasks that differ from the company’s usual course of operations.
  • The individual independently performs work through an independently established trade, occupation, or business that is similar to the company in question.

AB-5 simply codified the Dynamex court ruling into law. 

Ramifications for California Employers

For many California employers, the passage of AB-5 means making difficult decisions about current staffing levels and reconfiguring their operations to meet the requirements of California employment law as it applies to the hiring and management of employees. 

AB-5 did carve out numerous exceptions for workers who provide professional services and business-to-business contractors, but for companies whose workers do not qualify, the passage of AB-5 means drafting new employment agreements, establishing employee policies and procedures, paying payroll taxes, and making sure they stay in compliance with California’s requirements regarding minimum wage payments, meal breaks, and much more.

Ramifications for California Employees

For many gig workers, the prospect of receiving the protection and benefits of employee status is a welcome proposition. Others fear unemployment if companies that have grown dependent on gig labor decide to shed workers in the face of added labor costs. And for many freelancers, AB-5 poses a challenge to their ability to set their own schedules, perform work for their clients without running afoul of the ABC test, or maintain a home-based business instead of working under the authority and direction of someone else. 

Getting Help

The actual effects of AB-5 will take some time to manifest fully as it faces court cases brought by companies like Uber and DoorDash, not to mention a likely ballot challenge in November. That said, many employers and freelancers are taking action now to come into compliance with the law since it went into effect in January. If you need help with AB-5 or any of California’s other new laws, reach out to our firm today for a free initial consultation. 

Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.