How to Help Clients Understand the New CA Worker Status
JD Supra, Littler, Lexology
February 7, 2020
- Last edition
February 11, 2020
What Is AB-5?
AB-5 is law that was passed in the state of California on September 18, 2019. Also known as the “gig worker bill,” it was passed to further solidify the ruling handing down in Dynamex Operations West, Inc. vs Superior Court of Los Angeles.
The law redefines “independent contractor”, with the potential effect of sweeping many, many new workers into the category of “employee” rather than a contractor. AB-5 was meant to target companies like Uber or Lyft that contracted its services to individuals who were never technically employees of the company, and therefore ineligible for benefits, etc.
That has changed now, and while the future of the law remains uncertain, and likely to be defined over years of lengthy legal battles, each business in the state of California (or that does significant business in California) needs to evaluate the status of its employees.
The ABC Rule
AB-5 does away with the broader definition of “independent contractor” that was in used before, and replaces it with a three-part evaluation, the “ABC Rule”. In order for a worker to be classified as an independent contractor, they must meet all three of these criteria. It is not enough to only have a few, all three must be in place.
First, the worker must be “free from control and direction in the performance of services”. Second, the worker must be “performing work outside the usual course of the business of the hiring company”. Finally, the worker must be “customarily engaged in an independently established trade, occupation, or business”. Essentially, this means a contractor must be completely separate from the hiring company, and only perform contracted services that it performs for other businesses.
But for companies like Uber, a “contractor” who only ever performs the services of the parent company and must do so in the manner prescribed by the hiring company, is now considered an “employee” and entitled to all the rights and privileges that entails.
What Comes Next?
The biggest step California businesses must take is to evaluate their current contractors to see if they now fall under the new definition of an “employee”. It is difficult to know exactly how these definitions will settle in practice, but the ABC Rule is a good place to start. It should be understood that this does not apply to typical business liaisons, such as accountants, attorneys or insurance agents.
There are other exceptions as well, and lists are provided on the appropriate government websites. If a company finds that its workers do in fact need to be reclassified, then those workers will need to be absorbed into the existing employee structures, with set wages, benefits, etc. Or perhaps the business relationship needs to be restructured if the costs are too great. Each business will need to determine, with the help of their agent, the changes that need to be made for their individual business.