Updated: On September 18, 2019, California Governor Newsom signed AB 5 into law.
Recently, California passed Assembly Bill 5 (“AB 5 or bill”), which lays out a stricter standard for determining whether an individual is legally considered an “independent contractor” rather than an “employee” of a business.
AB 5 may significantly impact businesses who classify a large part of their workforce as independent contractors, commonly referred to as “gig-workers.” If these businesses reclassify these workers as employees, they will be subject to a bevy of federal and state labor and wage laws that they were not previously subject to as independent contractors.
AB 5 has been significantly lobbied against by businesses, who have signaled they plan to spend millions for a ballot initiative to overturn AB 5.
Independent Contractor or Employee?
The determination between a worker being classified as an “independent contractor” rather than an “employee” has significant implications on how employers must legally treat them. Employers may be required to provide employees with health care, unemployment insurance, overtime pay, workers’ compensation, minimum wage, and other benefits that they are not legally required to provide to independent contractors.
It is important to note that simply labeling an individual an “independent contractor” does not necessarily mean they are an independent contractor in the eyes of the law. Rather, the proper classification of workers is an important determination with various legal ramifications that employers should consult with their legal counsel about.
AB 5 Definition of Independent Contractor
AB 5 codifies the landmark decision in Dynamex, the 2018 California Supreme Court case which sets out an “ABC” test for determining whether an individual is an “independent contractor” rather than an “employee.” Under the ABC test, an individual providing services for renumeration is presumed to be an employee, unless the hiring entity (i.e. the employer) is able to demonstrate the individual meets the following standards:
- They are free from the employer’s control;
- They perform work that is not central to the employer’s business; and
- They are engaged in an independently established business that performs the same services provided to the employer.
The Dynamex ABC test is stricter than federal standards or the Borello factors, which was the test previously utilized by California courts (before the Dynamex decision) to determine whether a worker was an independent contractor.
Exceptions under AB 5
AB 5 exempts specific occupations from the application of the Dynamex standard. Rather, these occupations must apply the less strict Borello factors when determining whether a worker is an independent contractor. The exempted occupations include:
- Licensed insurance agents;
- Certain licensed health care professionals (physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians);
- Licensed lawyers, architects, engineers, private investigators and accountants;
- Registered security broker-dealers or investment advisers;
- Direct salespersons; and
- Commercial fisherman working on American vessels.
In addition, contracts for “professional services” shall also utilize the Borello factors. AB 5 outlines a specific list of professional services that qualify under this more liberal standard (including, but not limited to the following: contracts for certain marketing, human resources, and graphic design).
AB 5 and Employer-Sponsored Healthcare
AB 5 may require certain employers to provide employer-sponsored healthcare to employees that were previously classified as independent contractors.
The Affordable Care Act (ACA) Employer Mandate requires certain employers to provide healthcare coverage to their full-time employees and their dependents or potentially face a penalty. The ACA Employer Mandate applies to Applicable Large Employers (“ALEs”), those with 50 or more full-time and full-time equivalent employees, on average, in the prior year. The ACA does not require employers to provide coverage to independent contractors.
Under AB 5 employers may choose to reclassify individuals who are currently classified as “independent contractors” to “employees.” For these re-classified individuals, employers may be required to offer health care coverage under the ACA if they are full-time employees, which are employees that work on average 30+ hours per week or 130+ hours per month.
Employers should consult with their legal counsel to determine whether they want to reclassify any of their California independent contractors to employees. If employers choose to reclassify their independent contractors, they should be aware that these employees will be subject to wage and labor laws. In addition, certain employers may have to offer their full-time employees health care coverage under the ACA.
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