The GIG Economy Just Became a Harder Gig!

What is AB5 IN California? 

Gov. Gavin Newsom just signed a controversial bill to possibly reclassify independent contractors as W-2 employees. Make sure to stay up to date on all compliance.

Misclassification claims are a frequent source of litigation because employees are entitled to minimum wage, workers comp, overtime pay, and other benefits, etc.. that are not afforded to independent contractors.

The law will raise costs and administrative burdens for businesses as some workers are reclassified as employees, said Samantha Wellington, senior vice president, chief legal officer and secretary of TriNet, a Dublin, Calif.-based HR solutions provider.

Why is it called AB5?

In a lawsuit in California –  Dynamex Operations v. Superior Court about whether someone would be classified a w-2 employee or independent contractor the court used a test.  The test is called yes – the “ABC” test. (So why isn’t called the AB3 since it has 3 tests?)

Under the test, a worker is presumed to be an employee unless the employer can show all of the following:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs tasks that are outside of the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

This test is actually way more complicated then the previous methods and filled with inconsistent case law on each piece of the test.

AB 5 will extend the ABC test to all provisions of the California Labor Code and Unemployment Insurance Code unless another definition of “employee” is provided. So, for example, the ABC test will now even apply to a labor-code claim for wrongful termination in violation of public policy.

There are some exceptions like doctors, investment advisors and some direct sellers—but NOT gig-economy workers. 

Historically many employers try to NOT classify certain contractors as employees – significant increased costs and liabilities and flexibilities – will try to fight this.

For example –  Uber and Lyft and Door Dash pledged to spend $90 million, if necessary, on a ballot measure to exempt their companies from the new law, according to The New York Times

Uber’s chief legal officer Tony West said drivers are properly classified as independent contractors—even under the new standard. “Because we continue to believe drivers are properly classified as independent, and because we’ll continue to be responsive to what the vast majority of drivers tell us they want most—flexibility—drivers will not be automatically reclassified as employees,” even after Jan. 1, 2020, when the new law takes effect.

West said Uber will continue to arbitrate and litigate misclassification claims as necessary. “But we will also continue to advocate for the independence and choice that drivers tell us again and again in surveys, polls, focus groups and personal conversations that they value most.”

What do you do?

Employers in all industries should audit their contractors to determine if their workers are properly characterized as independent contractors.  Franchisees, delivery drivers, housekeepers, exotic dancers, janitors and security guards have been caught up in misclassification litigation and even I.T. consultants.

This ABC test will represent a major change for all businesses in the state, Wellington said. “They’ll need to update their policies and procedures and carefully scrutinize their relationships with outside vendors to ensure compliance.”  or get a professional to help like a CPEO.

Set up a quick call with your PEO-OLOGIST.

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