The Expansion of California Assembly Bill 5 and Your Company

How California Assembly Bill 5 Could Impact Your Business

In mid-September, California’s governor signed Assembly Bill 5 (AB5) into law. Effective January 1, 2020, AB5 changes the criteria that define independent contractors. Employers that are not aligned with the new law could be at risk of misclassification claims by their employees. What’s more, New York and Illinois are looking into adopting similar laws. What does this emerging labor law trend mean for your company?

Employee or independent contractor?

Starting in 1989, California had used a 10-factor test, sometimes referred to as the “right to control” test. This test would help determine whether a hiring entity or a contractor had control over the means used to accomplish their work. In 2018, California’s Supreme Court took a new direction with its ruling in Dynamex Operations West, Inc. v. Superior Court – to instead use an ABC test for claims based on issues like minimum wage, overtime and breaks. The California Supreme Court’s decision limited the ABC test to Wage Order components, but not to other California Labor Code claims or unemployment claims.

What is the ABC Test?

Assembly Bill 5 expands the ABC test to apply to the Unemployment Insurance Code and California Labor Code, basically to all employment purposes in the state. The Dynamex ABC test deems all workers as employees, unless the hiring entity can demonstrate that the worker in question meets all three of these conditions:

  1. The worker has complete freedom in how they perform work duties. The company does not direct or control them.
  2. The person performs work that is not a regular part of the hiring entity’s business.
  3. The worker has a history of independently working in this way with other companies.

The issue of control and direction of work duties is no longer the core of worker classification; it is now only part of a three-prong test. Companies that retain contractors risk having to treat those workers as employees if they cannot meet the requirements of the ABC test. That could result in having to offer benefits to independent contractors that include worker’s compensation, unemployment insurance, expense reimbursement, paid sick leave, and more.

Other laws also come into play when companies treat contractors as employees. For example, Section 2802 of the California Labor Code has been interpreted to mean that virtually all expenses incurred by employees in the course of their work must be reimbursed by their employer.

Who’s impacted by California’s Assembly Bill 5?

Although AB5 will impact most companies that use independent contractors, the bill granted exemptions to a range of professionals. Exemptions include accountants, doctors, dentists, engineers, insurance agents, lawyers, psychologists, real estate agents, stockbrokers and others. AB5 allows other workers exemption, provided they meet other requirements to qualify for the exemptions.

While your company may not be in or have independent contractors in California, New York and Illinois are also looking to adopt these measures quickly. It wouldn’t be surprising to see other states follow suit in 2020.

Risks of violating California’s AB5

There is some uncertainty around how California will enforce AB5 once it goes into effect. Lawsuits will have to make their way through California’s legal system before consequences are known.

The new law allows both cities and the state to challenge companies’ worker classifications. That means employers out of compliance are exposed to additional lawsuit risk beyond action taken by individuals or groups of workers. While settlements are an option in cases filed by workers, government litigation will require a company found to be in violation to correct their misclassification.

What should my company do about this?

Employers can take steps now to prepare for AB5 to go into effect on January 1, 2020.

  • Assess the number and extent of your independent contractor relationships.
  • Identify and correct independent contractor relationships that could put your organization at risk.
  • Seek California legal counsel to help you establish a compliance strategy.
  • Look for other areas where your company could risk being out of compliance with labor laws.

Many organizations fail to reimburse employees for all business expenses. How are you currently reimbursing employees that drive personal vehicles for business? Do you know if they’re receiving a rate that properly reimburses them? Are employees using personal devices for work purposes? Take a good look at how your company handles employees’ mixed-use assets. It could help with avoiding labor law violations beyond Assembly Bill 5. Learn more about the cost of under-reimbursing here.

Explore the Consequences

The Author

Danielle Lackey

As Chief Legal Officer, Danielle is responsible for all Motus legal affairs and works with strategic business units to drive initiatives that bolster IRS and legal compliance for Motus clients. Prior to joining Motus, Danielle co-founded and served as CEO of Cadence Counsel, a company that helps law firms and companies thrive in an environment where work, as we know it, is rapidly changing. Before founding Cadence Counsel, Danielle practiced as a litigator at Latham & Watkins, representing major corporations and senior executives in complex civil and criminal matters. She earned her J.D. with Distinction from Stanford Law School and is a graduate of Brown University (Phi Beta Kappa, Magna Cum Laude).

Read more by Danielle Lackey

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