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Home » Overtime & Minimum Wage Law » AB 5: The New Cal­i­for­nia Law That May Turn Many Con­trac­tors Into Employees

AB 5: The New Cal­i­for­nia Law That May Turn Many Con­trac­tors Into Employees

November 14, 2019 by Lisa Guerin

Woman using Lyft app | California AB5

At mid­night on Jan­u­ary 1, 2020, Uber and Lyft dri­vers in Cal­i­for­nia may trans­form from con­trac­tors to employ­ees. No, that’s not a mod­ern reboot of Cin­derella. Instead, it’s a pos­si­ble result of a new and con­tro­ver­sial state law: Assem­bly Bill 5 (AB 5).

Learn­ing Your ABCs

AB 5 uses a new test to deter­mine whether work­ers should be clas­si­fied as inde­pen­dent con­trac­tors or employ­ees. Under AB 5, work­ers are pre­sumed to be employ­ees unless the employer can prove that they:

A. Work free from the con­trol and direc­tion of the com­pany that hired them, both under the terms of their con­tract and when actu­ally doing their work

B. Do work that is not part of the employ­er’s usual busi­ness, and

C. Cus­tom­ar­ily engage in an inde­pen­dent busi­ness, pro­fes­sion, or trade doing the same type of work.

This “ABC” test is sim­pler and broader than the cur­rent Cal­i­for­nia test or the fed­eral test that applies to many other states. Under the AB 5 rule, many work­ers who are cur­rently clas­si­fied as inde­pen­dent con­trac­tors will have to be clas­si­fied as employees.

Inde­pen­dent Con­trac­tors Have Fewer Legal Protections

This clas­si­fi­ca­tion issue is impor­tant because of the dif­fer­ences in how the law treats employ­ees and inde­pen­dent con­trac­tors. Employ­ees are enti­tled to the min­i­mum wage, over­time pay, health and safety pro­tec­tions, work­ers’ com­pen­sa­tion, and unem­ploy­ment insur­ance, among other things. Inde­pen­dent con­trac­tors don’t enjoy these protections.

What’s more, employ­ers don’t have to with­hold pay­roll taxes from inde­pen­dent con­trac­tors. Nor do they have to pay a share of the contractor’s Social Secu­rity and Medicare taxes. Employ­ers must do all these things for their employ­ees. These dif­fer­ences give employ­ers a pow­er­ful incen­tive to clas­sify work­ers as inde­pen­dent con­trac­tors rather than employees.

Who Is Exempt From AB 5?

AB 5 does include some excep­tions — for exam­ple, it does­n’t cover invest­ment advi­sors, real estate bro­kers, hair­styl­ists, and cer­tain other pro­fes­sion­als. But most of the work­ers whom we think of as belong­ing to the gig econ­omy will be cov­ered by the ABC test set out in AB 5.

Ques­tions Remain About the Law’s Scope

Even in Cal­i­for­nia, many ques­tions remain about exactly who the law cov­ers. The Cal­i­for­nia leg­is­la­ture will answer some of those ques­tions when it passes clar­i­fy­ing leg­is­la­tion. Other ques­tions will be answered by the courts.

For exam­ple, in Sep­tem­ber 2019, an Uber dri­ver filed a class action law­suit against the com­pany for mis­clas­si­fy­ing dri­vers as inde­pen­dent con­trac­tors rather than employ­ees. This case may be an early test of whether gig employ­ers fall within the bound­aries of the new Cal­i­for­nia law.

The gig econ­omy com­pa­nies claim they are just “dig­i­tal plat­forms” for match­ing gig work­ers with peo­ple who need their ser­vices. In other words, they say they’re not in the busi­ness of dri­ving, deliv­ery, clean­ing, or what­ever ser­vice the work­ers pro­vide. There­fore, their work­ers don’t pass the Part B of the ABC test.

But the law­suit argues that the ser­vices dri­vers pro­vide are clearly part of Uber’s usual business—providing dri­ving ser­vices. Once courts begin to weigh in on this dis­pute, we will know more about the law’s scope.

Will Other States Fol­low in the Foot­steps of AB 5?

AB 5 is a Cal­i­for­nia law, so it applies only within the bound­aries of the state. Because Cal­i­for­nia, which brought the world the “gig econ­omy,” is also often a leader in employ­ment law, other states may fol­low California’s lead in defin­ing what makes a per­son an “employee” rather than a con­trac­tor. One-​third of U.S. work­ers are part of the gig econ­omy, so the ques­tion of whether these work­ers are employ­ees or inde­pen­dent con­trac­tors will need to be answered in every state.

Some states (includ­ing Ari­zona and Florida) have already passed laws that clas­sify most gig work­ers as inde­pen­dent con­trac­tors. And many states already have their own ver­sion of the ABC test. But the ques­tion remains unan­swered in many other states: Stay tuned for more devel­op­ments on this hot topic.

More Infor­ma­tion

To learn more about rights and pro­tec­tions for work­ers in your state, see Legal Consumer’s wage and hour law learn­ing cen­ter.

Filed Under: Overtime & Minimum Wage Law, Unemployment Benefits Tagged With: california, employee, employer, independent contractor, workers compensation

About Lisa Guerin

Lisa Guerin has covered employment law topics for Legal Consumer since 2014. After getting her law degree from Berkeley Law, she worked in government, public interest, and private practice, specializing in employment law. She was a legal editor and author at Nolo for many years, where she wrote or contributed to more than a dozen books, mostly on employment issues. She volunteers with groups that help shelter and rescue dogs, and she enjoys hiking with her own Very Good Boy in the San Francisco Bay Area.

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