In an attempt to protect workers from misclassification, California Governor Gavin Newsom signed California’s Assembly Bill 5 (AB5) into law on Sept. 18, 2019. The enactment of this bill will require a test to determine whether a gig economy worker qualifies as a contractor, or if they should be reclassified as an employee.

This diversion would result in a contractor (or gig worker) being reclassified as an employee. This means they would now receive benefits with the addition of being covered by minimum wage, overtime, unemployment, and paid leave upon the effective date of Jan. 1, 2020.

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Who’s affected.

Here’s the simple answer: mostly app-driven services and businesses with independent contractors in the state of California.

In a previous blog, we discussed that a virtual marketplace company (VMC) is “an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services.”

We also touched on the Department of Labor (DOL) stating in an opinion letter that individuals who work in this realm are to be classified as independent contractors rather than regular employees. With the new AB5 in progress, these classifications are prone to change based on the qualification test.

App-Based Companies

App-based companies like Uber and Lyft are in the spotlight with this recent signing. Many are familiar with the nature of these apps when it comes to working for them. The hours are intended to be self-scheduled by the driver and on an as-needed basis.

Uber and Lyft set the price of the ride, the customer pays the company, which in the end, pays the driver. AB5 may drastically change the way these companies run their business.

Independent Contractor Defined

An independent contractor, defined by the IRS is a payer who has the right to control solely the result of the work but does NOT hold the right to what will be done and how it will be done. If you are self-employed, you are an independent contractor.

Referring to the term gig economy, if you are a gig worker, you are almost always considered an independent contractor.

New changes to come.

California’s Supreme Court has decided to abandon its ‘Borello’ test which previously determined worker classification. The Borello court used five factors in determining worker classification. These five factors were:

  1. The worker’s chances for profit or loss
  2. The worker’s personal contribution towards material and or equipment for the authorized task
  3. Whether the task or service performed by the worker requires specialized skills
  4. The time frame or degree of permanence established in the working relationship
  5. Whether the workers' services extended are an essential part of the employer’s operations

Now, they will be initiating what’s named the “ABC test”. This test abandons the previous five factors used by the Borello test and narrows it down to three.

Under this test, an individual is considered an employee unless they can confirm that:

  1. An individual is NOT under the control and direction of the hirer in coherence with work performance unless they can confirm the worker'.
  2. The worker performs duties outside of the usual course of the hiring entities business.
  3. The worker follows customs or usual practices in an independently established trade, occupation, or business of the same structure as duties completed for the hiring entity.

Governor Gavin Newsom understands the apprehension surrounding his signing of AB5 and has promised to keep speaking with businesses who are anxious about the changes to take effect on Jan. 1, 2020.

If you are an employer with independent contractors in the state of California, you may want to keep an eye on this bill and how it may affect you in the new year. 

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Editor's Note: This post was originally published in June 2012 and has been updated for freshness, accuracy, and comprehensiveness. 

Disclaimer: Please note that this blog is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.