California Assembly Bill 5 was introduced by California assemblywoman Lorena Gonzalez and endorsed by Governor Gavin Newsom. It was approved by the California State Senate 29-11 on a party-line vote, by the Assembly by 56-15, and signed by Governor Gavin Newsom in September 2019.
The bill is set to take effect from January 2020 and will have significant impact on how businesses in California engage and classify contingent or gig workers.
The aim of the new law is to help with the misclassification of workers, where workers were being classified as independent contractors, rather than employees and therefore not being included with basic employee benefits and protections, such as sick leave and holiday pay.
The bill is intended to make it harder to classify workers as independent contractors by using the ABC test which says that says workers are employees if (A) they perform tasks under a company’s control, (B) their work is integral to the company’s business and (C) they do not have independent enterprises in that trade.
Nicknamed “the gig worker bill“, much of the initial discussions about its impact was more focused on the well known ride sharing companies, however the bill will have a far greater reach with the potential to touch all companies in California.
Prior to this legislative initiative, all industries were covered by the Dynamex decision for so-called “wage order” claims. However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses. AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims and soon followed lobbying for exemption from over 50 industries and businesses. As a result, certain businesses and industries have been listed as exempt from the ruling.
Those carved out of AB5 are the following:
- selected professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants)
- broker dealers, investment advisers, direct salespersons, private investigators, and commercial fishermen
- selected professional service providers that meet all of six specific requirements in the following occupations: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists
- licensed real estate salespersons, repossession agents, estheticians, electrologists, manicurists, barbers, and cosmetologists
- business-to-business contractors that meet all of 12 specific requirements
- selected construction subcontractors and motor club service providers
- referral agencies connecting clients with service providers that meet all of 10 specific requirements in the following industries: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup.
While misclassification of workers is a growing concern for governments around the world, the IRS has been consistently cracking down on independent contractor use, and the Department of Labor began a Misclassification Initiative in 2011. The DOL can secure unpaid wages for misclassified employees, and the Internal Revenue Code includes some hefty penalties for failing to deduct and withhold taxes of misclassified employees, including double penalties for employers who disregard reporting requirements.
With the law going into effect January 1, 2020, companies that utilize workers currently classified as “independent contractors” should consult with their contingent workforce / HR partners to evaluate how best to determine whether the new law applies to those independent contractors, and if so, to ensure compliance with the new law.