California Assembly Bill 5 was signed in 2019 and put into effect in 2020. The bill was used to codify the California Supreme Court ruling implementing the ABC test for worker classification disputes. Its sole purpose was to redefine and clarify how employees would be differentiated from independent contractors and handicapped employers who wish to misclassify their employees. Even though the battle to get the bill passed was hard fought by employee rights advocates, there are some professions that are still exempt from the ABC test under AB5 as well as AB2257 and Prop 22.
What is California Assembly Bill 5 (AB5)?
California Assembly Bill 5 revolutionized worker classification by narrowing down the definition of an independent contractor to three qualifying questions known as the ABC test. The bill expands on the ruling from the 2018 case Dynamex Operations West, Inc. v. Superior Court of Los Angeles which mandated the use of the ABC test for worker classification regarding wage order claims. The bill allows for some industries and professions to be exempt, and subsequent legislature has been passed to add to that list, but for the most part, California AB5 greatly increased the number of workers in the state that are protected by the law as W-2 employees.
Timeline of the AB5 Law in California
- In April of 2018, the California Supreme Court ruled on the Dynamex case by basing worker classification on a list of three criteria known as the ABC test.
- In September of 2019, the California governor signed Assembly Bill 5 in order to apply the ABC test to the state’s Labor Code as well as the Unemployment Insurance Code.
- In January of 2020, the law went into effect and changed the classification for millions of workers from independent contractors to employees throughout the state.
- In September of 2020, Assembly Bill 2257 was signed and put into effect modifying some aspects of AB5 and adding to the list of exempt professions.
- In November of 2020, Proposition 22 was approved as a way to add app-based services to the list of exemptions despite the fact that AB5 was largely intended to help gig workers.
Why AB5 is Needed
In 2000, the United States Department of Labor conducted a study that showed 10-30% of employers had misclassified their workers. They also discovered that when independent contractors challenged their classification, they were reclassified as employees approximately 95% of the time.
Misclassification affects everyone. On a government level, when an employer misclassifies an employee as an independent contractor, they avoid having to pay for worker’s compensation and unemployment insurance as well as Social Security and Medicare. Every year, misclassification of employees costs the state of California an estimated $7 billion in unpaid taxes.
For the individual, being misclassified as independent contractors denies workers the rights and benefits that they would otherwise be entitled to under the law as employees, such as:
- Minimum Wage
- Paid Sick Leave
- Paid Family Leave
- Overtime Pay Rates
- Workers’ Compensation
- Protection Against Discrimination
- Protection Against Sexual Harassment
- Unemployment Insurance
What is the Gig Economy?
The term “gig economy” refers to freelance work generally arranged through websites or apps. Some of the most well-known gig economy jobs are rideshare and delivery drivers. Gig work appeals to many due to the flexibility in scheduling as well as the freedom to pick and choose individual jobs. Unfortunately, it also leaves workers vulnerable without the protections and support given to standard employees. Many industries have utilized gig workers as it relieves employers of many of the responsibilities and legal restrictions involved in having employees.
Impact of AB5 on Workers
One of the 3 components of the ABC test that defines someone as an employee is if the work being done falls within the normal business of the company. This directly impacts gig workers like rideshare and delivery drivers whose work is the entirety of the business of the company. AB5 was meant to reclassify those gig workers as employees and give them the rights, benefits, and protections legally entitled to any employee in California such as minimum wage, health insurance, worker’s compensation, and anti-discrimination policies.
One of the primary arguments against reclassifying gig workers as employees is that workers chose to be independent contractors in order to be free from the control of an employer. Countless employers allow their employees to work flexible schedules, wear what they want, choose their own assignments, and have considerable control over how they go about their duties. However, many gig based companies have implied that if they have to provide their workers with higher pay, better benefits, and more protections, the workers will lose that freedom and control.
Impact of AB5 on Businesses
Many companies use independent contractors instead of employees because it is more cost effective. Reclassifying those workers would mean more money spent on wages, sick leave, taxes, worker’s compensation insurance, and unemployment insurance. For companies that structured their entire business model on classifying all of their employees as independent contractors, this can have a major financial impact. Some of those companies have implied that they will raise prices to have the customers cover the increased expenses rather than take it out of their own profits. Many industries and companies that rely on independent contractor labor are working to overturn or circumvent the new regulations implemented by AB5.
Penalties for AB5 Violations
Some employers choose to simply ignore the law and continue to misclassify workers in order to avoid the responsibilities and restrictions involved in hiring employees, but they do so at their own risk. Employers who violate AB5 can face serious consequences. A single civil penalty for an AB5 violation can be anywhere from $5 thousand to $15 thousand. On top of that, they may be liable for back pay or other corresponding fines and penalties. If an employer is a repeat offender, they can face initial civil penalties of $10 thousand up to $25 thousand per violation.
What is the ABC Test Used in CA AB5?
In the 2018 Dynamex case, the California Supreme Court implemented the ABC test to determine if a worker is an employee or an independent contractor. They mandated that a worker must be classified as an employee unless the employer can prove:
- That the worker has total freedom to choose every aspect of when and how they complete their work
- That the job being done by the worker is not part of the company’s usual course of business
- That the worker is customarily engaged in the work as their own independently established business, occupation, or trade
All three of these criteria must be met in order to classify a worker as an independent contractor.
When AB5 solidified this test as state law, it allowed for some exemptions. A major backlash against AB5 and the ABC test came from companies in the app-based rideshare and food delivery industries. These companies rely on independent contractors to perform work that is their primary course of business.
Some professions are exempt from AB5 due to extenuating circumstances inherent in the jobs themselves. Some have conditions such as commercial fishermen who are exempt from AB5 but still entitled to unemployment insurance. Reasons for exemptions include:
- Setting their own rates and prices
- Having direct communication with customers
- Being paid directly by customers
- Being paid more than twice the minimum wage
- Scheduling their own appointments
- Being paid based on sales commission
Types of jobs that may be exempt from AB5 and the ABC test include:
- Freelance Writers
- Graphic Designers
- Hair Stylists
- Insurance Agents
- Private Investigators
- Real Estate Agents
- Travel Agents
- Youth Sports Coaches
Some business to business contractors as well as some referral agencies may be exempt if they meet the applicable specific requirements. Workers who are considered exempt from AB5 and the ABC test may still be subject to the Borello test which is an older test to determine employment classification that was implemented by the California Supreme Court in 1989.
What is AB2257?
In September of 2020, the California governor signed Assembly Bill 2257 which modified AB5 and expanded the list of exemptions. One way in which they did this was by getting rid of the limit for how much a content creator could make to an outlet before they would be considered an employee. Many professions were added to the list of exemptions such as:
Business to business contractors and referral agencies were also given a greater chance of being exempt. These modifications did not include rideshare and delivery drivers or the companies they work for. In response, those companies set about bringing forth their own legislative action.
Proposition 22 Changes
California Proposition 22 is a ballot initiative designed to allow app-based rideshare and delivery companies to continue classifying their drivers as independent contractors. Instead of the benefits and protections entitled to employees, the proposition offered a wage floor, accident insurance, and healthcare subsidies for drivers who work at least 15 hours each week.
Prop 22 was approved in November of 2020 but was quickly challenged. In August of 2021, a Superior Court Judge for Alameda County ruled that aspects of Proposition 22 were unconstitutional, rendering the entire thing unenforceable. The companies behind Prop 22 appealed, which kept the measure in effect during the proceedings. In March of 2023, the appeals court reversed the ruling which subjected gig drivers to proposition 22 with the right to unionize in order to collectively bargain.
Contact Mesriani Law Group If You Have Been Misclassified
Worker classification is an important issue. When a worker is an employee by definition but is classified as an independent contractor, they lose out on the wages and benefits they are entitled to and are not protected by state anti-discrimination laws. Our firm is experienced in handling AB5 violations and holding employers accountable. Our employment attorneys are hardworking and dedicated to helping our clients navigate the legal system and get the compensation they deserve. If you believe you are considered an employee under AB5 and have been misclassified as an independent contractor, call Mesriani Law Group today for a free consultation.
Assembly Bill 5 FAQs
What is California Assembly Bill Number 5?
California Assembly Bill 5 that codified the ABC test as the primary method of determining if workers should be classified as employees or independent contractors. The test examines if the worker is free to control when and how they complete their work, if the work performed is outside of the company’s usual business, and if the worker is engaged in an independently established trade occupation or business for the work being done. The bill was largely aimed at app-based gig work, but subsequent legislature followed that created ways around it.
Did Assembly Bill 5 pass?
Assembly Bill 5 was signed into law in September of 2019 and put into effect in January of 2020. It was based on a California Supreme Court decision made in April of 2018 that implemented the ABC test to settle a classification dispute in regard to a wage-order claim. While the bill did allow for some exemptions and considerations, many industries quickly sought to create more. Assembly Bill 2257 was passed in September of 2020 to modify AB5 and expand possibilities for exemptions. Proposition 22 was passed in November of 2020 to exempt rideshare and delivery drivers. Prop 22 was ruled to be unconstitutional and unenforceable by an Alameda County Superior Court Judge in August of 2021, however that ruling was quickly appealed and was reversed in March of 2023.
Who does AB5 apply to?
Assembly Bill 5 is a statewide law that mandates all workers are considered employees unless the employer can prove that the worker:
• Has full freedom and control over their schedule and how the work is done
• Is doing work that is not part of the company’s usual course of business
• Does the work regularly as their own independent business or trade
There are some exceptions and exemptions such as some workers who have their own business license, negotiate their own fees, set their own schedule, are in direct communication with customers, or make at least twice the minimum wage. Separate requirements can be applied for business-to-business contractors and referral agencies. Even if there is an exemption from AB5, there is further evaluation that must be done in order for an employer to classify workers as independent contractors.
What does AB5 mean for owner operators?
Owner operator truck drivers are not exempt from AB5 and due to the fact that their work is a primary course of business for the companies they work for, they are considered employees. This does create some complications due to the interstate nature of the trucking industry. Owner operator truck drivers who reside in California, work for a California based company, or regularly work within the state, should familiarize themselves with the law in order to best understand their rights within their specific situation and know what their options are.