California Assembly Bill 5 or AB 5 is a California law which limits the use of classifying workers as independent contractors rather than employees by companies in the state. Employees are entitled to greater labor protections, such as minimum wage laws, sick leave, and unemployment and workers’ compensation benefits, which do not apply to independent contractors. Concerns over employee mis-classification, especially in the gig economy, drove support for the bill.

It was introduced by California assemblywoman Lorena Gonzalez[2] and endorsed by Governor Gavin Newsom.[3] It was approved by the California State Senate 29-11 on a party-line vote, by the Assembly by 56-15, and signed by Governor Gavin Newsom in September 2019. It will take effect January 1, 2020.

The law codifies a stricter set of requirements laid out in a California Supreme Court decision regarding the classification of employees. The bill was supported by many labor leaders, unions, ride-share driver groups, and state Democrats. It was opposed by state Republicans, the California Chamber of Commerce, and gig economy companies Uber, Lyft, and DoorDash, which pledged to spend $30 million each on a 2020 ballot initiative to reverse AB 5. After its passage in the legislature, Uber and Lyft both said they planned to keep drivers classified as contractors, saying they could pass the stricter test.

Provisions

On April 30, 2018, the Supreme Court of California ruled in Dynamex[9] to impose stricter requirements for employee classification. It created a 3-part test to determine whether an employee could be classified as a contractor rather than an employee, commonly known as the “ABC” test, replacing a previous 11-point standard set in Borello[10] in 1989 (the Borello test).

The bill, introduced in December 2018, places the ruling on a statutory footing[13] by inserting §2750.3 to the California Labor Code, and, as a general rule, puts the burden of proof on employers to show that a worker is properly classified as an independent contractor where all three of the following conditions are met-

THE TEST:

• the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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

This test is excluded in certain specified cases, where Borello will continue to apply. This is declared without qualification for a specified list of occupations, and, for other stated professional, B2B and construction services, respectively, separate lists of conditions must also be fully applicable in order to establish that a worker is an independent contractor.[18] Real estate licensees and repossession agencies were declared to be governed by the California Business and Professions Code instead.

The law also gives cities in the state the right to sue companies for violating the law, where previously they could not. The California Attorney General’s office and local prosecutors can also sue companies.

Proponents of the bill said it would give workers previously classified as contractors minimum wage, overtime, sick leave, unemployment and other benefits, and prevent the state from losing $8 billion from payroll taxes that independent contractors and companies who use them do not pay and social benefits required due to lower pay. Opponents said it would increase labor costs by up to 30%, create higher costs for customers and reduced service, and reduce flexibility for workers.

After discussions and amendments to the law, which primarily included exceptions for certain professions, the bill first passed the Assembly in May 2019. In August 2019, as the bill neared passage, gig economy companies Uber and Lyft also proposed a negotiated $21 minimum wage but to keep employees as independent contractors as an exception. The proposals were not accepted by the legislature. Other amendments and exceptions were made, primarily to exclude particular professions. The bill drew national attention, including the support of multiple 2020 presidential candidates.

After its final passage in the legislature, on September 11, 2019, Uber and Lyft both said they had no plans to reclassify workers as employees, with Uber’s Chief Legal Officer Tony West saying “Just because the test is hard doesn’t mean we won’t be able to pass it. We continue to believe that drivers are properly classified as independent.”

In response to the implementation of the law, the United States Court of Appeals for the Ninth Circuit reinstated its decision in Vazquez v. Jan-Pro, which impacts California franchise law and California independent contractor law, by making it unclear that if a franchiser licenses its trademark to a franchisee whether the franchiser incurs the liabilities of an employer.

Exceptions
Some professions are exempt from AB 5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers. Newspaper delivery workers will be given an extra year before compliance.

If you having trouble determining your classification, then we can help. We are experienced in these matters and will be very happy to help you here at Beyer, Brown and Rosen.