When is someone an “employee” versus an “independent contractor”? The State of California is about to make that very clear with AB 5—legislation that is now sitting on Governor Gavin Newsom’s desk—which he told the Sacramento Bee he will sign. The California law will be a much clearer and stricter law than the federal guidelines on independent contractors. The law also gives California cities like Malibu the right to sue companies for violating the law, whereas previously they could not.
AB 5 is to take effect in January 2020.
Much of the wording in AB 5 actually became the law last year after a landmark state supreme court decision in favor of delivery drivers. Dynamex Operations West, Inc. v. Superior Court applied a definitive “ABC test” for companies in California to determine which workers can be classified as independent contractors.
The new law will assume that a worker is an employee. A worker can only be treated as an independent contractor if the employer can prove the following:
(A) That the person is free from control and direction while performing the job, runs an independent business and has full say over how, where and when they complete the job,
(B) That person has been hired to do something outside of the hiring company’s usual business.
(C) That person works in an independently established trade, occupation or business.
There are many types of self-employed professionals who will not be included in the new law, such as: insurance brokers/agents, doctors, dentists, lawyers, architects, engineers, private investigators, accountants, investment agents, salespeople, commercial fishermen, real estate agents, psychologists, podiatrists, stock brokers, veterinarians, direct sellers, hairstylists and barbers, aestheticians, marketing professionals, travel agents, graphic designers, grant writers, fine artists, enrolled agents, payment processing agents, repossession agents and human resources administrators. There are exceptions for photographers, photojournalists, freelance writers, editors or newspaper cartoonists who make 35 or fewer submissions a year, as well as for some types of business-to-business activities.
One key issue among newspaper publishers was that of carriers—otherwise known as newspaper delivery people—who are considered independent contractors. After a strong push from California-based newspapers that urged the legislature to exempt newspaper carriers, publishers will now have until January 2021 to make carriers official employees (thanks to a different bill, AB 170, which is also expected to become law).
“The newspaper industry will try to figure out a model that works for distribution within the means the industry has, and to work with the legislature to try to use the intent expressed in AB 5,” California Newspaper Publishers Association General Counsel Jim Ewert, who negotiated with legislators to secure the one-year reprieve, told USA Today.
Over the years, many businesses across the country started knowingly (or unknowingly) misclassifying employees as “independent contractors” in order to keep costs down—or, some allege, as a way to make more money. The National Employment Law Project estimates businesses save roughly 30 percent by calling workers independent contractors rather than employees. The practice is so lucrative, it even became the business model for companies like Uber, Lyft and Doordash, who pledged $90 million to fight AB 5 by getting it on next year’s ballot.
That 30 percent savings comes because employers don’t have to pay independent contractors minimum wage, overtime or workers’ compensation, and they don’t get paid sick days, paid vacation time, health and dental insurance, retirement, pension or unemployment. The independent contractors must pay all their own payroll taxes for social security and Medicare and don’t qualify for protections under the Fair Labor Standards Act, Americans with Disabilities Act or the Civil Rights Act.
The state says loopholes that enabled years of misclassification— and an estimated $7 billion in losses of payroll tax revenue— will be closed with AB 5.
“A lot of [companies’ actions] don’t pass the laugh test,” Cathy Ruckelshaus, general counsel at the National Employment Law Project said on a CBS News report. “A janitor who gets hired by a contractor to go clean an Applebee’s or a movie theater? They’re not ‘running their own business.’ They’re not really setting their own hours or setting their own pay rate.”
Some estimate that nearly two million Californians currently classified as independent contractors will need to be reclassified as employees under the new law.
The types of independent contractors that are most likely to gain employee status under the new law tend to work not only for ride-sharing and food delivery companies, but for trucking, logistics, port service, newspaper and magazine publishers, cleaning companies, websites, software companies, construction, health services, nail salons and adult entertainment.