How AB5, California’s New Employee Classification Law Could Affect You
California’s groundbreaking Assembly Bill 5 (AB 5) went into effect on Jan. 1st, becoming the standard for determining whether workers should be classified as employees or independent contractors. All companies using independent contractors in California will be put through a three-part test to determine whether they must reclassify their workers. If they don’t pass that test, they’ll have to turn their workers into employees.
The debate that raged around the bill for months focused mainly on its effects on Big Tech and gig economy companies such as Uber, Lyft and Postmates. But by the time the legislation became law last year, its scope broadened to encompass an array of industries, from transportation/trucking to journalism. Proponents of the bill say that it forces companies to replace gigs with jobs that entitle employees to state-mandated protections like paid time off, coverage for job injuries, and unemployment insurance. Critics of AB 5 say despite its good intentions the legislation has boomeranged on contractors, making it harder for tens of thousands of them to make a living in a tight economy.
The three-part AB 5 “ABC classification test” requires businesses to use the following test in determining whether a worker is an employee or an independent contractor:
“(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
If even one of the conditions is not met, then the worker is classified as an employee. As concerns grow over the new law, large companies and third-party organizations like Uber and Airbnb are looking for ways to avoid having to take on a rush of new “employees” under this classification.
Our assessment of AB 5 is that it will have major tax implications across a wide variety of businesses and industries. Talley welcomes the opportunity to discuss what AB 5 may mean for you and your business. For more information, feel free to contact us