California’s AB5 Law: What Your Business Clients Need to Know About the Landmark Bill in 2020

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BY:
Jeff Gans

Senior Vice President

March 10, 2020

On Sept. 18, California’s governor signed into law Assembly Bill 5. The AB5 law (also known as the gig-economy law), has made it costly and difficult for businesses to claim that their workers are independent contractors and not employees who are entitled to benefits such as minimum-wage rates, paid leave, overtime pay, workers’ compensation and health insurance.

How Does AB5 Work?

If workers are not independent contractors, they are employees. The new law requires businesses to use the state’s “ABC” test to prove workers are indeed independent contractors and not employees.

Specifically, a business must prove that:

  • The worker is free from the company’s control and direction of the hiring entity.
  • The duties performed by the worker are not essential to the company’s core business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

With the ABC Test, an employer must prove all three elements in order to qualify for independent contractor status. If an employer can only prove two of the three elements, they will not qualify.

What Should Businesses Know About the Law in 2020?

AB5 became effective January 1, 2020 – however, it is effective July 1st for Workers’ Compensation. In addition, a handful of industries are currently exempt and will continue to use the Borello test until further determination. The following are issues that businesses should be aware of when it comes to the AB5 law.

  • AB5 has integrated the ABC test into California’s Labor Code and Unemployment Insurance Code. If a business fails the test and lacks sufficient capital to satisfy a misclassification judgment or award, both the government and private litigants can pursue Labor Code monetary penalties based on the misclassification from officers and directors personally.
  • Increased workers’ compensation costs. Having to reclassify independent contractors will very likely result in an increase in workers’ compensation premiums for many employers. For some businesses, these costs may be difficult to absorb and significantly impact revenue.
  • Bigger incentives for misclassified contractors. The expansion of the law has created new incentives for misclassified contractors and the government to go after businesses for things like unpaid payroll taxes, business expense reimbursement, paid family leave benefits, paid sick leave, workers’ compensation coverage for service-related injuries and unemployment benefits.
  • Aggressive enforcement. Businesses that violate the law may be subject to new aggressive government enforcement and prosecution by the state’s attorney general. In addition, there may be prosecution for noncompliance by the city attorney and/or city prosecutor.

Moving Forward

An estimated 53 million independent contractors work in the U.S. These workers can help employers reduce labor costs by as much as 30%, which is the main reason that many businesses use independent contractors as part of their daily operations. It’s also why the AB5 law is getting pushback from the business community. Many companies, like Uber and Postmates, are fighting back, arguing that AB5 violates federal and state constitutional guarantees of equal protection and due process. As the law continues to evolve in California, employers in all states should take a wait-and-see approach but remain informed as to updates to the law.

From Workers’ Compensation to General Liability, we can help you find the right coverage for your commercial business clients to better mitigate their risk exposure. To learn more, please contact Jeff Gans, Senior Vice President, Worker’s Compensation at RIC, a division of Worldwide Facilities. Jeff can be reached at jgans@wwfi.com or (775) 473-7366.

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