What Does California AB5 Mean for Business Owners?

Let me just start this by saying, I’m not your lawyer. If you have an attorney and are concerned the below information may impact your business, please contact your lawyer and discuss how you can address. If you don’t have a lawyer and have concerns, now would be a good time to start interviewing. But nothing below is going to give you the exact solution for YOUR particular business and is general information. That being said, here’s what I think after following this for a while:

         Ever since the Dynamex decision came down in 2018, the business community has been abuzz with how the test will apply to them. Will their industries be affected? Were there any possible exemptions?

         ICYMI, the Dynamex decision completely upended the entire way independent contractors were handled; effectively reclassifying all workers to employees, unless they could meet a certain test that was wildly different from the test previously used to determine classification of workers. That test is known as the ABC Test. Effectively, it states that all workers are considered employees by default, unless the hiring company can meet a three-part test:

  1. The worker is free from the control and direction of the hirer in performance of the work (both if in writing and in practice);
  2. That the worker performs work that is outside the usual course of the hiring entities’ business; and
  3. That 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.

The part of this test that had companies freaked were prongs B and C of the test. Nobody was more freaked than those participating in the “gig” economy. Companies particularly like Uber and Lyft already had ongoing cases in the courts. But, they were hanging their hats on falling outside prong B and that the test didn’t apply to them.

         California has answered back with AB5 passing the Assembly, and heading to Governor Gavin Newsom’s desk for signature as early as tomorrow. AB5 aka “An act to amend Section 3351 of, and add to Section 2750.3 to the Labor Code, and amend Section 606.5 and 621of the Unemployment Insurance Code, relating to employment, and making an appropriation therefor” (that’s a mouthful), introduced by Assembly Member Lorena Gonzalez, seeks to address the rise of worker exploitation by clarifying how the Dynamex case will apply to those in the “gig” economy.

         The bill (which can be read in its entirety here), in essence says that the ABC Test will apply, unless there’s already a statutory exception from employment status, and also clearly exempts certain occupations. These exemptions are:

  • licensed insurance agents;
  • certain licensed health care professionals;
  • registered securities broker-dealers or investment advisers;
  • direct sales salespersons;
  • real estate licensees;
  • commercial fishermen;
  • workers providing licensed barber or cosmetology services; and
  • others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

If your business falls outside of these exemptions, then the ABC Test will apply. However, if a court rules in an individual case that the ABC Test doesn’t apply, then the Borello standard applies. This is a much less stringent standard and is also known as the “economic realities” test.

         In arguing that the ABC Test doesn’t apply, companies like Uber and Lyft are claiming that the work performed is outside the usual course and scope of their business, as they do not provide rides, they provide technology.

         So, how does it apply to me? Will I get in trouble right away if my workers have been misclassified this whole time? Well, not necessarily. The bill has stated that it will not be applied retroactively. Unless you already have an ongoing suit prior to the enactment. So long as you aren’t already in litigation, you can clean up your business practices by January 1, 2020. Yep, it goes into effect come January 1.

         There’s more. If you took action to reclassify your workers from ICs to employees already, and you believe your workers don’t meet the ABC Test, it’s unfortunately too late for you. You can’t use AB5 as a reason to reclassify workers from employees back to ICs.

         If a business falls outside of one of the exempted professions (commercial fishermen and manicurists have exemptions, but only until 2022 and 2023), a business would be wise to evaluate all independent contractor relationships it currently has, review all of their agreements, and determine whether the work being performed meets the ABC Test. This should be done with the understanding that misclassifying workers carries with it high litigation risk and severe financial consequences if you fail in court. If, however, a court determines the ABC Test does not apply, only then will the looser Borello standard apply. For many businesses, the cost of a potential employment lawsuit far exceeds the costs of re-classifying its workers.

         The case law still remains to be fleshed out. Until then, businesses should start housekeeping in preparation of 2020.