AB5 Makes it More Difficult to Classify Workers as “Independent Contractors”

At a glance

• The main takeaway: Governor Gavin Newsom has signed into law a new piece of legislation entitled AB5.
• Impact on your business: AB5 is based on the ABC Test established by the California Supreme Court, and it outlines specific criteria for classifying workers as independent contractors.
• Next steps: AB5 will have distinct legal and tax implications for certain workers who typically identify as independent contractors, including gig workers. Aprio is here to help you understand how you may be affected.

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The full story:

Recent legislation is going to make it more difficult for employers to classify workers as independent contractors. On September 18, 2019, Gavin Newsom signed into law AB5, which will transform a large proportion of independent contract workers (such as delivery and transportation drivers) into employees, based on new criteria for classification.

A closer look at the legislation

This law follows the “ABC” Test established by the California Supreme Court in the 2018 Dynamex case. Some workers will be exempt from the law, including insurance brokers, doctors, dentists, lawyers, architects, engineers, accountants and real estate agents. Under the ABC Test, a worker may only be classified as an independent contractor if:

• The worker is free from control and direction of the hiring entity in connection with the performance of services;
• 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 of the same nature as the work performed.

Currently, workers classified as contractors do not receive minimum wage, overtime pay, sick leave, family leave, unemployment and disability insurance, workers’ compensation, and protection against discrimination and sexual harassment. California state officials estimate that the state loses $7 billion a year in payroll taxes due to misclassification.

As a whole, the gig economy is fighting back. Lyft and Uber have said that they will spend $60 million to fund a ballot initiative in 2020 to ask voters to approve the creation of a new category for ride-hail drivers. Although lobbyists have convinced lawmakers in more than two dozen states to pass laws that classify drivers as contractors, experts say that these companies will face an uphill battle in California as they struggle to become profitable.

If you have any questions about AB5 and how it impacts you, contact your Aprio advisor today.