In September 2019, 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.
This new law drastically impacts all industries who rely on independent contractors for staffing needs.
The first major change is the new law assumes workers are employees. To prove otherwise, the hiring company has the burden of demonstrating that the worker meets a very specific test.
Namely, a worker can only be classified as an independent contractor if the company can show the worker meets all three parts of the following test:
- A – The worker is free from control and direction in the performance of services; and
- B – The worker is performing work outside the usual course of the business of the hiring company; and
- C – The worker is customarily engaged in an independently established trade, occupation, or business
Part B will be the biggest obstacle for most hiring companies.
For example, if the worker is performing work that is integral to the hiring company’s business, then they will be classified as an employee. It will be incredibly difficult for most companies to prove a contractor isn’t doing work for the core of their business.
Most businesses attempting to hire workers in an area related to their product or service; whether to supplement their workforce, expand to new geographies, or even provide a distinct component of a process necessary to create the goods or services—will likely be in violation of the law, if they treat the workers as independent contractors instead of employees.
Additionally, even if the hiring company can show the worker is not performing work within the usual course of the hiring company (Part B), the company would still have to show that the worker was free from the company’s control (Part A) and that the worker has an independently established business or provide services to other companies (Part C).
A hiring company’s evaluation of whether a worker is properly classified as an independent contractor under the new law will be dependent on these specific factors and these factors may change over time.
The new law does carve out exemptions for certain industries, but that list is limited and is not a blanket exemption. Even “exempt” hiring entities must still meet nearly a dozen other specific requirements in order to show their independent contractors are not actually employees.
This new law will go into effect January 1, 2020. Companies should start preparing now for the new risks and regulations associated with AB5.
How WORKERS.COM Can Help
Partnering with us will eliminate the risk of misclassifying your workers under the new law. If you want to continue to use your contractors but keep your business California compliant, we would be glad to help.
We provide Payroll Processing, Tax Withholding and Workers Compensation Insurance.
Don’t get caught up in the legal quagmires that will be associated with this new law. Call Us today to discuss your options.