California’s Gig Economy Law: 5 Things to Know

The new “Gig Economy Law” – also known as Assembly Bill 5 (AB5) – was signed into law on September 18, 2019.  How much the law will actually impact California companies, employees and independent contractors has been a hot topic ever since.   Here are five things you should know about AB5: 

1.  The law’s intent is to guard against further “erosion of the middle class and the rise in income inequality,” and to protect workers from being exploited in the gig economy

Experts estimate that it is up to 30% cheaper to hire independent contractors than employees because then companies aren’t required to pay for things like unemployment insurance, workers’ compensation premiums, payroll taxes or Social Security contributions. 

2. The law codifies the California Supreme Court’s decision in Dynamex

The Dynamex case, decided in spring 2018, established the “ABC Test” as the standard in California for determining whether or not a worker is properly classified as an employee or an independent contractor.  The ABC Test presumes an employment relationship unless the hiring entity can demonstrate three things – A, B and C.  More on Dynamex and the ABC Test.  

In addition to codifying the Dynamex decision, the law extends the scope of the ABC Test beyond just wage and hour cases to also encompass workers’ compensation and unemployment insurance.   

3.  Some parts of the law are retroactive

Those provisions of the law that codify the Dynamex decision are meant to apply retroactively to existing claims and actions “to the maximum extent permitted by law.”    

However, the parts of the law that serve to expand the scope of Dynamex to cover workers’ compensation and unemployment insurance will be effective on January 1, 2020.   

4.  AB5 contains many exemptions from the ABC Test, but they’re either very specific or difficult to qualify for.

The law specifies many categories of workers that may be considered exempt from application of the ABC Test.  Some exemptions, such as those for commercial fishermen and manicurists, come with expiration dates. 

Exemptions also exist for insurance agents, health care professionals like doctors and dentists, lawyers, engineers, accountants, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, workers providing licensed barber or cosmetology services, and subcontractors in the construction industry.   

Freelance journalists are exempt for up to 35 submissions per year to a single outlet, but at 36 submissions, the law would require them to be treated as a part–time employee of the outlet.   

There is a general exemption for providers of professional services that applies if the hiring entity can demonstrate that the person they hired: 

  1. maintains their own business location separate from the hiring entity (this could be the person’s home);  
  2. has a business license and any required professional license;  can set their own rates, completion dates and hours; 
  3. Can set their own rates, completion dates and hours;
  4. is customarily engaged in, or holds themselves out to other potential customers as available to perform, the same type of work as they are doing for the hiring entity; and 
  5. customarily and regularly exercises discretion and independent judgment. 

There is also an exemption for “bona fide business to business” contracting relationships.  This exemption may be relied on when the business service provider is providing services directly to the contracting business rather than to customers of the contracting business. There are eleven other requirements that must be met for a bona fide business to business relationship to exist – including that the service provider in fact has other clientele for whom they perform similar services. 

5.  Courts may determine factual contexts where the ABC Test “cannot be applied,” and may instead apply Borello in those cases

Under Section 2 of the law, if “a court of law rules that the [ABC Test] cannot be applied to a particular context …, then the determination of employee or independent contractor status in that context shall instead be governed by [Borello].”  More on Borello

Author Photo

Robert Ottinger, Esq.

Robert Ottinger is an employment attorney who focuses on representing executives and employees in employment disputes. Before starting his firm, Robert slugged it out in courtrooms trying cases for the government. Robert served as a Deputy Attorney General for the California Department of Justice in Los Angeles and then as Assistant Attorney General for the New York Attorney General’s Office in Manhattan.

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