Breaking Down California Assembly Bill 5 and its Effect on Your Business in 2020

The labor market is constantly changing, from legislation establishing new minimum wages to new laws around data privacy. But perhaps the most impactful recent change, at least in California, is this: Assembly Bill 5 (AB5). What exactly is this bill? And how will it affect your business? Let’s dive into the details.

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What is AB5?

AB5, also commonly referred to as the “gig worker law,” went into effect January 1, 2020. It left little doubt in anyone’s mind that most workers are and should remain employees. As a result of the law, it’s likely that many independent contractors will be reclassified as employees.

Here’s how it works. Businesses/employers must consider new hires as employees, and not independent contractors, unless a new hire meets all of the following criteria:

  1. The worker is free to perform services without the control or direction of the company both under the contract and in fact.
  2. The worker is performing work tasks that are outside of the usual course of the company’s business activities.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed (e.g. a driver who is an independent contractor for a rideshare service, but also offers the same service through his or her own business).

The law could affect workers such as meal delivery and courier drivers, ride-sharing drivers, and owner-operators of big trucks, to name a few. On the other hand, it provides exceptions for positions such as physicians, attorneys, architects, insurance salespeople, and accountants, among others.

What triggered AB5?

The answer you’ll frequently hear is that it’s the result of today’s app-based, independent-contractor-fueled, ride/ridesharing services. As The Washington Post states, “Assembly Bill 5, which passed the California legislature in September, aimed to give hundreds of thousands of gig economy contractors employee status, providing wage floors and benefits along with worker protections.” So, in essence, proponents of AB5 want to force companies to reclassify independent contractors as employees, so that these workers are legally entitled to minimum wages, benefits such as health insurance, and even breaks.

The Issue for Employers

Employers could obviously lose the relatively affordable labor of independent contractors, with their flexible schedules and lack of benefits. For those employers who have routinely used independent contractors, this could have a big impact on the business, as it could significantly balloon their payroll and other HR-related expenses. These costs can’t simply be absorbed; they must be offset somehow. Will businesses be forced to pay less than competitively in their market? Will they utilize temporary workers? Will they have to shrink their workforce?

It’s too early to answer those questions, as AB5 is currently mired in a tangled legal web. Already, companies are suing the state of California. Not to mention, a judge just temporarily blocked the law from affecting truckers. And that’s the tip of the iceberg; more legal battles are just as inevitable as they will be tense.

The Pros and Cons for Workers

For independent contractors turned employees, they’re legally guaranteed the aforementioned benefits and perks, so they gain a sense of security. While that goes a long way, there is a big loss. Most independent contractors choose to operate under the classification because it grants them an immense amount of flexibility. They’re able to work whenever they please, which can be far more attractive to some than a strict, repetitive schedule.

It seems that the majority of contractors have issue with AB5 and refuse to embrace it. SB Nation Executive Director John Ness recently wrote, “In the early weeks and months of 2020, we will end our contracts with most contractors at California brands.” In response, SB Nation contractor/writer Rebecca Lawson tweeted, “Today, along with literally HUNDREDS of my colleagues, I was told that I can no longer hold a paid position at SB Nation. California, you’re breaking my heart (and taking my money). #AB5.”

In the above example, and countless others, the law serves to suppress job growth that voluntary self-employment creates.

What should your business—and staffing partner—do?

Recognize that AB5 is in a state of flux. Yes, the law passed, but there are many legal battles attached to it. Some companies are taking a wait-and-see approach, while others are considering converting independent contractors to permanent or temporary W-2 employees. There’s even speculation that a new class of worker could be born. It really is a messy, ongoing battle with lots of potential effects, so make sure you stay tuned in.

Over the last few months, Adecco has built several customized solutions in which we become the employer of record for clients’ workforces, helping them comply with AB5. If you would like to do the same—or at least explore some options—please contact us.

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