Thousands of California businesses use independent contractors to help boost profitability and productivity. But things are about to change, and many California businesses aren't happy about it.
Assembly Bill 5 puts new limits on how California companies can implement independent contractors in their business. Governor Gavin Newsom signed the bill into action in January, explaining that the law "will help reduce worker misclassification — workers being wrongly classified as 'independent contractors' rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits."
Under AB5, everyone who works for a company will be considered an employee, unless the employer meets 12 specific and detailed requirements, put together by the California Supreme Court last year. A worker is classified as an employee if the job they do is part of the company's core business, and if the employer is in charge of directing and overseeing their work. If the worker has not claimed independent contractor status, they're an employee. This means they are entitled to the benefits of being an employee and held to the same standards as a traditional employee.
This bill was put in place to restrict companies from classifying all of their workers as independent contractors and bypassing the obligations regarding benefits, overtime pay, and insurance that are required for employees. But with these new laws comes even more questions.
How will CA AB5 be enforced?
Because every industry has such unique regulations regarding employment status, it is safe to say that there is some grey area between what the law says and how businesses are supposed to put it into effect. One of the biggest obstacles will be in the interpretation of the law. Since the law says that workers are employees if:
the worker is free from control and direction in the performance of services; and
the worker is performing work outside the usual course of the business of the hiring company; and
the worker is customarily engaged in an independently established trade, occupation, or business
It is up to the employer to determine precisely what that means for their industry. AB5 allows the California attorney general and local prosecutors to sue companies if they violate employment classification. If (and when) this happens, a judge's order would be required to mandate companies to reevaluate how they are classifying their workers. Multi-million dollar companies, like ride-sharing and app-based delivery companies, would probably fight these orders in lengthy and costly legal battles.
What about businesses that work outside of state lines?
Since California has the biggest economy in the country, it is common for its economic policies to cause a ripple effect throughout the county. AB5 has the potential to influence similar laws in other states, so companies who hire employees that work out of the state should prepare to follow the new guidelines, even across state lines.
Who is exempt? And who isn't?
Along with a grey area regarding how to enforce the law, there are also conditions about who actually has to comply to AB5 and who doesn't. According to the National Federation of Independent Business, the following industries are exempt from AB5:
Doctors, surgeons, dentists, podiatrists, psychologists, or veterinarians performing professional or medical services provided to or by a health care entity;
Lawyers, insurance brokers, architects, engineers, private investigators, or accountants;
Securities brokers/dealers or investment advisers and their agents and representatives that are registered with the Securities and Exchange Commission, the Financial Industry Regulatory Authority or the State of California;
Real estate agents, repossession agencies, direct-sales persons, commercial fishermen;
Individuals performing services under a contract with a licensed "motor club."
Other professions are exempt, but their exemptions come with industry-specific conditions. For example, barbers, cosmetologists, and manicurists who have full control over their rates, their schedules, and their work, are exempt.
I'm a California employer. What do I need to do?
Education is power. The more you know about AB5 and its implications on your industry, the easier this transition will be. Talking with an attorney that specializes in employment law is an excellent first step, as well as performing an audit that carefully analyzes how your company handles contracts, rate negotiations, documentation, work structure, and interactions between employees and independent contractors.
Another way to remain in compliance with AB5 is to hire an Orange County staffing company to help you navigate new hiring processes. A professional staffing agency can help you determine a classification system for your workersz
. It is essential to find a staffing agency that is educated on the new laws and upholds the obligations of their agreements.
AB5 is sure to change the game when it comes to independent contractors, and only time will tell if and how these new laws and regulations will impact California’s vibrant economy.