California Assembly Bill 5 (AB5) is legislation that went into effect on January 1, 2020. The law requires companies hiring independent contractors to reclassify them as employees unless they are able to prove that the workers meet a three-pronged test.

The ABC test was established following a legal ruling in a 2018 case heard by the California Supreme Court, Dynamex Operations West, Inc. v. Superior Court and Charles Lee, Real Party in Interest, 4 Cal.5th 903 (Cal. 2018). That case was filed by a company by the name of Dynamex Operations West and the court ultimately ruled that companies need to use the test so they can determine how workers should be classified.

The three prongs of an ABC test are:

  • 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.
  • The worker performs work that is outside the usual course of the hiring entity’s business.
  • 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.

How the ABC Test Works

If a worker meets all three prongs of the ABC test, then they can be classified as an independent contractor. However, if they do not meet all three prongs, then they must be classified as an employee.

AB5 was intended to regulate companies hiring gig workers in large numbers, like Uber, Lyft, and DoorDash. However, on November 3, 2020, California voters approved Proposition 22, an initiative which was backed by companies such as Uber, Lyft, and DoorDash and legally designated drivers for those app-based ride-hailing and delivery services as independent contractors—overriding AB5.

As a result of Proposition 22, the ABC test no longer applies to app-based drivers in California. However, it still applies to other gig workers in the state.

Here are some of the key takeaways of AB5:

  • It requires companies hiring independent contractors to reclassify them as employees, unless the companies can prove that the workers meet the ABC test.
  • It was designed to regulate companies hiring gig workers in large numbers.
  • It was overridden by Proposition 22, which legally designated drivers for app-based ride-hailing and delivery services as independent contractors in California.

Impact of AB5 on Workers and Employers

The most immediate implication of AB5 was that it turned some independent contractors into employees. This means that such workers would now be entitled to a minimum wage, reimbursements for business expenses, employee benefits, rest breaks, and certain other benefits that are afforded to employees under California state law. 

However, gig workers could lose flexibility in choosing when and when not to work. The impact of AB5 on businesses typically centers on cost. 

If companies would now have to pay minimum wages, offer paid time off and health insurance, and pay unemployment insurance and worker’s compensation benefits for their new crop of employees, AB5 might have a significant impact on their bottom lines. Some businesses may choose to pass on these costs to consumers in the form of higher prices. 

Others may choose to reduce the number of employees they hire or to automate certain tasks that were previously done by employees. Still others may choose to exit the California market altogether.

The full impact of AB5 on businesses is still unknown. However, it is clear that the law could have a significant impact on the way many businesses operate in California.

Here are some additional details about the implications of AB5 for businesses:

  • Increased labor costs: Businesses that are now required to treat their independent contractors as employees will need to pay them a minimum wage, provide them with benefits, and withhold taxes. This all could lead to significant increases in labor costs.
  • Reduced flexibility: Businesses may have less flexibility in how they schedule and deploy their workforce. This could be a challenge for businesses that rely on independent contractors to provide on-demand services.
  • Increased compliance costs: Businesses will need to comply with a variety of new regulations, such as those related to wage and hour laws, tax withholding, and occupational safety and health. This could lead to increased compliance costs.

Overall, the implications of AB5 for businesses are significant. Businesses will need to carefully consider the law’s impact on their operations and make changes as needed.

Speak with an Experienced Mountain View Small Business Attorney

Kalia Law P.C. is your workplace law partner, as we help businesses position themselves to bring aboard gig economy workers and defend their business model should it be called into question. Our litigators have a long record of achieving exceptional results for businesses defending these cases at the state and federal level, and we have successfully represented businesses from major industries in cases across the country, including actions in California and other locations where new laws have made it more challenging for companies to classify their workers as independent contractors.

We understand the many complexities of the gig economy and the laws that govern it, and we can help you assess your risk of misclassification and develop a plan to mitigate that risk.  Call (650) 701-7617 or contact us online to take advantage of an initial appointment.

- Claire Kalia


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