California's new bill AB 5 was signed into law by California Governor Gavin Newsom. This legislation creates a new standard for determining how to classify workers as independent contractors or employees.

What is AB5?

The California Assembly recently passed a new piece of legislation called California Assembly Bill 5 (AB 5). Also, known as "the gig workers bill," the legislation was signed into law in September 2019 and became effective on January 1, 2020. This bill provides further clarification following California's 2018 Supreme Court case, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles (4 Cal.5th 903). The legislature states," By codifying the California Supreme Court's landmark, unanimous Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law."

The law intended to regulate employers that employ large numbers of gig workers. Two of the most notable companies impacted by these changes are Uber and Lyft. Despite an expensive campaign against AB5 in California, these two rideshare companies were not eligible for exemption from this bill. As the law stands now, there will be significant implications for Californians working in the gig economy. Approximately 400,000 workers work for gig platforms similar to Uber or Lyft, and another 1.5 million freelance workers could also be covered under the new bill. Unsurprisingly, Uber, and Lyft promise to fight the bill. Having to reclassify most gig workers as employees could bankrupt gig employers and threaten the gig economy.

Misclassification issue revitalized: independent contractor vs. an employee

AB 5 impacts the California meaning of an independent contractor versus an employee. It's an issue of misclassification; that is, employers who, knowingly or unintentionally, classify gig workers as independent contractors when they are employees. Misclassification of employees has a significant financial impact on employers. This economic impact is especially true for employers with a broad constituency of independent contractors that may have misclassified them. Employees enjoy certain protections such as workers' compensation if injured on-the-job, unemployment insurance, minimum wage laws, paid sick leave, and paid family leave that do not apply to independent contractors. AB 5 may extend those protections to misclassified independent contractors. However, independent contractors may lose the flexibility to decide how and when they perform their work.

The rule before AB 5

Before January 2020, the classification rule in California was the Borello rule from S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), the California Supreme Court case that redefined the Worker's Compensation Act's definition of employment. In Borello, the court said that the test of employee versus independent contractor was a test as to whether the employer had the "right to control" the means and manner in which a worker performed work. There also are secondary factors under Borello, but the court said that the right to control performance was the most crucial factor to consider.

Overview of ABC standard

On and after January 2020, AB 5 mandates that employers use a new three-pronged test to determine whether to classify workers as employees. The ABC standard is a test to provide a more precise assessment to determine whether a worker is an employee or an independent contractor.

The Dynamex case says that "Under the ABC standard, the worker is an employee unless the hiring entity establishes each of three designated factors: (a) the worker's performance is free from control and direction by the hiring company both under the contract and in fact; (b) the worker performs work outside the ordinary course of the hiring company's nature of business; and (c) the worker engages in an occupation, trade, or business that is the same nature as the work he performs for the hiring company. If the hirer fails to show that the worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor."

The new standard creates a more transparent and straightforward way for companies to identify their workers. For many companies meeting the above criteria will be a challenge. Note that there are exceptions to the ABC test, including people engaged in professional services, such as:

  • HR administrators, travel agents, artists, writers, musicians
  • people who work under licenses, such as attorneys, engineers, surgeons, plumbers, electricians, private investigators, and accountants.

Limiting Dynamex to California wage orders

In Garcia v. Border Transportation Group, LLC, No. D072521 (4th District, Div. 1, October 22, 2018), the California Supreme Court found that Garcia was an independent contractor under the common law Borello test. The California Supreme Court decided the Dynamex case before the final appeal in Garcia. On October 26, 2018, the Court of Appeals said that the ruling in Dynamex only applied to the California wage orders claims in Garcia and not to the non-wage claims. The court explained that the Borello test applies to all other non-wage claims. The court reasoned that the Dynamex ruling did not reject the entire Borello test, so the Supreme Court must have intended the Borello test to continue to apply to claims based on the Labor Code.

Larger implications

In 2015, 24% of the American economy reportedly made money from some gig platform. According to the Bureau of Labor Standards, by 2017, 55 million Americans participated in the estimated trillion-dollar gig economy. Approximately 36% of U.S. workers and 33% of employers participate at some level in the gig economy. The term gig worker refers to freelancers, consultants, independent contractors, and temporary workers. Approximately 44% of such participants report it as their primary source of income. Experts in the industry expect the gig economy to grow to 87 million freelancers by 2027. Other states have already started to follow California's lead in adopting AB 5 type rules. Illinois and New York State, for example, have legislation in the works or recently passed into law. If the movement spreads to other states, the entire gig economy, a trillion-dollar gig economy, faces disruption.

A complete look at the California bill of AB5 is more lengthy than this brief overview. If you currently work with independent contractors the lawyers at Berglund Group can help your business determine if your workers are classified properly. Contact us today for a free consultation to get started.

The blog posts provided on this website do not, and are not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only.