What Gig Workers Should Know About the Current State of California’s AB 5
Every year, thousands of Californians are deprived of their legally entitled rights, benefits, and protections by employers who illegally classify their workers as temporary contractors instead of employees. In 2020, California passed a new law, known as AB 5, that took a bold stance against the epidemic of employee misclassification that runs rampant in the gig economy.
However, due to pushback from corporations and industries that opposed these new regulations and protections, additional legislation has been passed that modifies some of the impact that AB 5 has for gig workers.
In this blog post, we’ll walk through the basics of AB 5 for California workers. We’ll explain how AB 5 cracks down on employer misclassification, what recent legislation has impacted this landmark law, and what you should know about getting help for illegal misclassification in California.
What is California AB 5?
Assembly Bill 5, otherwise known as AB 5, is a California law that regulates how companies classify and treat workers hired on a temporary or contractual basis.
The bill, which went into effect on January 1, 2020, was designed as a response to calls for increased legal protections for “gig workers” and others who make a living through flexible, temporary, and freelance working arrangements.
It does this by effectively making it more difficult for companies to classify workers as “independent contractors,” rather than employees who receive a W-2.
Independent contractors, however, don’t enjoy these same labor protections. Whereas companies are required to cover payroll taxes, Social Security payments, and workers’ compensation insurance for their employees, they don’t have the same legal obligation to workers hired as independent contractors.
The unfortunate result is that companies often intentionally misclassify workers in order to cut corners on the financial obligations of hiring full employees. For instance, a company may hire for a role advertised for an independent contractor, but then have responsibilities and supervision that’s more appropriate for an employee.
The 2020 bill was a way to protect freelance and gig workers from losing out on their legally entitled pay and benefits, while also simplifying the definition of the employment relationship for employers.
Put simply, AB 5 said that all workers are assumed to be employees — and should receive a W-2 — unless a company can prove otherwise. How? The bill sets down a three-part test, called the ABC test, that establishes the three criteria required for a worker to be considered an independent contractor:
1. The worker is free to control and direct his or her own work performance without interference from the hiring entity.
By contrast, if the hiring company subjects the worker to the same regulations, supervision, and oversight that they normally give to their employees, under this test, they could be seen as an employee.
Some examples of this behavior could be if a company insists that contractors seek permission or approval from the business for each step in their work, or if they require contractors to go through regular performance reviews, as is expected for other employees.
2. The worker’s duties and/or services are outside of the hiring entity’s usual course of business.
For instance, when a restaurant contracts an outside electrician to repair the electrical lines in the kitchen. The electrician’s work in this situation is not a part of the restaurant’s usual business.
However, if the business in question hires someone as a contractor whose work is comparable to that of existing employees, that could be considered work in the “usual course” of business. For example, if a bakery hires outside cake decorators to work on a regular basis to design and construct custom specialty cakes.
3. The worker is customarily engaged in an independently established trade, occupation, or business.
This means that the worker themself has independently made the decision to go into business for themself, and has taken clear actions to establish and promote their business.
These actions can include filing for incorporation or industry-appropriate licenses, putting up advertisements, or providing services to a number of customers in the general public simultaneously.
The ABC test itself comes from a case heard by the California Supreme Court in 2018, Dynamex Operations West, Inc. v. Superior Court of Los Angeles. AB 5 essentially takes the three-pronged test used by the court to differentiate between an employee and independent contractor in 2018 and applies it to companies statewide.
Under AB 5, a worker must meet all three of these conditions in order to be treated as an independent contractor by a company. As a result, the 2020 bill effectively expanded the benefits of employee status to many gig or temporary workers who’d previously been treated as independent contractors.
According to AB 5, since these workers are now employees, they’re entitled to California minimum wage pay, paid overtime, regulated meal and rest breaks, and the protection of the state’s anti-retaliation laws.
Additionally, as employees, they can file any wage-related complaints with state agencies such as the California Labor Commissioner’s Office.
By contrast, independent contractors who run into work-related conflicts, usually around the terms of their contracts with a company, have to seek other avenues for resolving their disputes.
Does AB 5 Apply to All California Workers?
As is common with laws, there are some exceptions to the workers that fall under AB 5’s application. The original bill specifically excluded certain positions and professional categories from reclassification under the ABC test. These include:
- Licensed insurance agents
- Certain health care professionals (i.e. surgeons, dentists, podiatrists, psychologists and veterinarians)
- Securities brokers
- Investment advisers
- Direct sales salespersons
- Commercial fishermen
- Private investigators
- Travel agents
- Graphic designers
- Grant writers
- Aestheticians (incl. Manicurists and cosmetologists)
Several months after AB 5 took effect, California passed a follow-up law — known as AB 2257 — adding to the list of jobs exempt from reclassification according to the ABC test.
Some of the additional exceptions in AB 2257 focused on industries and roles where contracting with multiple clients is the norm, such as in arts (e.g. fine artists, illustrators and newspaper cartoonists), media (e.g. photojournalists, videographers, translators), and communications (e.g. writers, copy editors).
Other exempt job categories are less obvious: for instance, insurance underwriters, animal services professionals, landscape architects, and real estate appraisers.
The full list of the jobs granted exemptions from the ABC independent contractor test can be found in the full text of AB 2257, along with other conditions required for the exemption to be valid.
Additionally, in November 2020, California voters approved Proposition 22, a ballot measure that also exempted drivers working for transit and food delivery companies from AB 5.
This measure — backed by popular rideshare and delivery companies like Uber, Lyft, and DoorDash — effectively bypasses AB 5’s requirements entirely.
With the passage of Prop 22, drivers for app-based transportation companies are automatically classified as independent contractors — and thus not eligible for the benefits the law specifically reserves for employees.
Since it was adopted in 2020, though, Prop 22 has faced a number of legal challenges brought by drivers and labor advocates who say that it’s unconstitutional.
However, until the anticipated evaluation by the California Supreme Court of the case against Prop 22, the measure’s stipulation of independent contractor status for drivers remains in effect.
What Happens if I’m Exempt From AB 5?
If you work in a role included in the exemptions listed above, this doesn’t necessarily mean that your employer can treat you as an independent contractor.
First of all, there are often still certain conditions required for each specific job category in order for an exemption to apply, as is outlined in the full text of both AB 5 and AB2257.
Additionally, what being exempt from AB 5 means is really just that you’re exempt from the ABC test’s method of defining independent contractors.
In these situations, another legal test is used to determine your employment classification. This is called the Borello test — named after the 1989 California Supreme Court case, S.G. Borello & Sons, Inc., v. Department of Industrial Relations — but it’s also known as the “Right to Control Test.” That’s because this test classifies workers as independent contractors according to how much control they — versus the hiring company — have over the means and manner of the work.
Unlike the ABC test, the Borello test is “multifactor”: it looks broadly at a number of different aspects of the worker’s responsibilities and relationship to the hiring company. Some of these factors include whether:
- The hiring company gives advance notice when they intend to terminate the relationship without cause.
- The worker performs the work without the direct supervision of the employer.
- The worker supplies their own materials and equipment, or uses tools and facilities provided by the company.
- The worker performing the work has the right to hire and terminate others.
- The length of time that the worker performs the services is considered temporary and fixed, or indefinite.
- The worker’s method of payment is based on job completion.
- The services performed by the worker are separate from the regular business or trade of the employer.
- The services the worker performs require special skills, and/or if these skills are an integral part of the employer’s regular business.
- The worker believes they are a member of an employer-employee relationship.
But in the Borello test, no single factor can make or break someone’s employee vs. independent contractor classification. Instead, employment status depends on examining all relevant parts of the working situation and how it’s conducted.
What Are the Penalties for Improperly Classifying Workers in California?
California imposes a variety of penalties on companies that misclassify their workers as independent contractors.
For one, employers can be subject to a number of fines for violating California’s wage and hour laws by treating someone who’d be legally recognized as an employee as an independent contractor.
Additionally, employers who have knowingly misclassified an employee can be subject to even further civil penalties under the California Labor Code, to the tune of $5,000 to $25,000 for each violation.
Workers who’ve been misclassified as independent contractors are entitled to recover the benefits they were deprived of by their employer. By bringing a civil lawsuit against a company, a worker can get financial restitution for unpaid wages, overtime, missed meal/rest breaks, and even attorney fees.
Think You’ve Been Misclassified? Contact an Employment Lawyer
The law, not your employer’s discretion, is what ultimately determines whether or not you’re an independent contractor or an employee.
Thanks to AB 5, California workers who’ve previously been excluded from employee status now have the ability to more easily achieve reclassification and access new benefits.
However, given the number of additions and exemptions that have been adopted since AB 5 was passed, it’s a good idea to consult with a lawyer if you have questions about your current employment status.
An employment attorney who specializes in California labor law can evaluate your situation, explain your options, and advise you on how to move forward if you have been misclassified.
Ottinger Employment Lawyers has been helping California workers win the benefits and justice they deserve for over 20 years. If you work in California and have questions about your employment status, contact our office today to speak with an attorney about your case.