What AB5 Compliance Means for California Employers

October 2019: Update on AB5

Regarding Independent Contractors and Newspaper Distributors​

On October 2, 2019, California Governor Gavin Newsom signed legislation (A.B. 170) exempting both of the following from the Dynamex/California Assembly Bill 5 independent contractor provisions:

  • A newspaper distributor working under contract with a newspaper publisher; and
  • A newspaper carrier working under contract, either with a newspaper publisher or newspaper distributor.

Dynamex/California Assembly Bill 5 amended the California law by clarifying that a person providing labor or services for remuneration will be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied ABC Test, see below.

Read the official update: CA A.B. 170

What does AB5 Mean for California Employers?

On Wednesday, September 18th 2019 California Governor Gavin Newsome placed the final signature on the AB 5 legislation, changing the face of worker classification in California. With the fifth leading economy in the world, this reclassification affects as many as 2 Million workers; transforming them from independent contractors into employees almost overnight.

Independent contractor


This law, brought upon by the infamous Dynamex ruling, amends the California Labor Code, California Unemployment Insurance Code and the IWC wage orders. These amendments state all ‘hiring entities’ must now classify ‘all persons that provide services or labor’ as employees UNLESS that ‘hiring entity’ can demonstrate that ALL conditions of the ABC test (below) are met.

The ABC Test

  1. The person 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 person performs work that is outside the usual course of the hiring entity’s business; and
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

What AB5 Classification Changes Mean for Employers

Though UBER, Lyft, and Grubhub have been the center focus due to the obvious and serious implications of this change to their business model, most employers are in the dark about what this could mean for them. As always, every major change regarding employment law comes with the unpreventable compliance nightmares, and AB5 will certainly be no different.

By January 1, 2020, California businesses, excluding those granted an exception (see below), will have to comply with the ABC test ruling or face a host of legal issues.

Workers now considered employees under the ABC test will be eligible for the following:

  • Minimum Wage
  • Overtime Pay
  • Meal and Break Rest
  • Worker’s Compensation Coverage
  • Unemployment Insurance
  • Various Benefits
  • Paid Sick Leave
  • State Family Leave (PDL, FMLA/CFRA, NPLA, FEHA, PFL, STD)

 



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And, while the law takes full effect beginning January 1, 2020, the retroactive implications of AB5 mean all previous independent contractors who are now considered employee status are covered by state civil rights laws including discrimination and harassment protections.  (See State Law Chart Regarding Harassment Training Requirements.) Additionally, employers have to accept the possibility of these workers forming Labor Unions.

In short, this new employment law makes it much more difficult for many companies to classify workers in California as independent contractors, while also increasing the difficulty for these businesses to hire smaller entrepreneurial businesses.

The List of Additional Business Compliance Requirements

Above and beyond the tasks of defining workers under these new classifications, come the additional requirements such as:

  • Updating your Employee Handbook to include these compliance specifications.
  • Providing State required Harassment Prevention Training to everyone now considered an employee.
  • Calculating correct Leave Requirements.
  • Calculating Wages, Break Periods and Overtime.

The Exceptions to the Ruling

Many employers in California became aware of the potentially detrimental change coming back in April 2018, with the California’s Supreme Court’s ruling to adopt the ABC test to determine independent contractor status. Certain professions were granted amnesty under the new classification requirements. 

These exceptions include:

  • Doctors
  • Dentists
  • Veterinarians
  • Lawyers
  • Architects
  • Engineers
  • Private Investigators
  • Accountants
  • Securities Broker-Dealers
  • Investment Advisors
  • Human Resource Administrators
  • Travel Agents
  • Marketers
  • Graphic Designers
  • Grant Writers
  • Fine Artists
  • Certain Photographers or Photo Journalists
  • Certain Freelance Writers

 



Other exceptions include stipulations such as:

Commercial Fisherman are exempt for all requirements except unemployment insurance.

Estheticians, electrologists, manicurists, barbers and cosmetologists are exempt ONLY if they:

  • Set their own rates.
  • Schedule Their Own Clients and;
  • Follow several other requirements specific to independent contractors rather than employees (as per the ABC test.)

Salespersons are exempt only if their pay is based on actual sales as opposed to wholesale purchases or referrals.



Though this exemption list may continue to grow with future legislation, businesses in California must adjust to AB5 Compliance quickly. And our services can make this transition as easy as possible.

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