California AB5 and Freelancers: What It Means for You
The beginning of the new year means change. For some of us, those changes are personal. However, sometimes the changes are less personal—like changes to state and federal law. While some of the new laws may have less of an impact than others (like allowing people to collect and eat roadkill), plenty of laws will affect a larger audience.
One such example is California Assembly Bill 5. While the law was passed in an attempt to protect gig economy workers, the law has wide-ranging impacts across many industries—not just in the gig economy.
There are a lot of questions and concerns (and lawsuits) about the new law. If you live in California and are a freelancer, you are probably directly impacted by it and have questions. Even if you don’t live in California, if you freelance for a California-based company, you still might be impacted by it.
We’re going to break down the basics of this new law (as of January 7, 2020). And if you’re concerned about the impact this will have on you, consult an attorney or accountant for expert advice.
What Is California Assembly Bill 5
Sometimes called “The Gig Worker Bill,” California Assembly Bill 5 (AB5) went into effect on January 1, 2020. The bill requires companies that hire independent contractors and freelancers to reclassify them as employees if their jobs and duties meet certain conditions.
The main factor that could trigger a reclassification is when the employee is central to the business—meaning that the business could not function properly without that particular employee (or position). There are, however, exceptions to this rule that would not require an employer to reclassify a worker as an employee.
Why AB5 Was Passed
AB5 was passed, in part, because of a 2018 case known as the Dynamex case. In that ruling, the California Supreme Court ruled that companies must use a three-pronged test (often referred to as the ABC test) to determine if someone is an employee or an independent contractor. AB5 was passed specifically to codify the Dynamex ruling.
The ABC test was created by the Massachusetts Independent Contractor Law, which was passed in the 1990s. The Massachusetts law was passed as a way to help the state determine who was entitled to unemployment compensation. This strict test was adopted, in part, because the IRS standards for determining who is and is not an employee can be somewhat vague.
The ABC test assumes that someone is an employee unless the company can prove these three things:
- The worker is free to perform services without the control or direction of the company.
- The worker is performing work tasks outside the usual course of the company’s business.
- The worker is performing the job duties of their regularly established trade, occupation, or business.
Sometimes, there is a fourth prong (or D), which states that the contractor must be in business for themselves. This is generally proven by the contractor having, for example, a business license from the state.
How the ABC Test Works
To figure out whether or not someone is an employee or independent contractor, an employer must examine the job and the duties the worker performs and apply each prong to the job. So, starting with the first prong (A), an employer must determine if the worker can choose on their own, for example, the dates and times they perform the job and how much they charge for services.
Then, for prong two, employers should figure out if the job tasks the worker performs are outside the normal course of business for the company. That means if you’re an employer and your company makes widgets, you can’t necessarily hire someone to make widgets, then classify them as an independent contractor.
For the third prong, you have to look at the job the worker performs and the jobs they’ve performed in the past for you and their other clients. Does this person perform plumbing tasks and only plumbing-related tasks for you? Or, do you have them come in and make the occasional widget, too?
ABC Test Examples
Let’s look at some examples. Say you own a bakery, and you need a new light fixture installed. How do you determine if the electrician you hire is an independent contractor or an employee?
You call an electrician, and they says he can come by next Tuesday at 11:00 to install the light, and he will charge you $100 for the job. You agree. He comes on Tuesday at 11:00, installs the light fixture, you pay him for the work, he issues you a receipt, and you each go on about your day.
The electrician set the date and time that the work would be done (A). He is installing the light fixture because you, the baker, cannot (B). The electrician is doing something he normally does as an electrician (C). According to the ABC test, this individual is an independent contractor, and you do not need to classify him as an employee of your business.
Using a different example, though, you can see where there is confusion when it comes to worker classification. Let’s go back to the bakery example.
Let’s say you get a large order, and, for whatever reason, you find you won’t be able to complete the order without hiring additional help. However, you don’t need to hire additional long-term help. You just need the help for this one job. So, you bring in your sister-in-law to help out. And, not only do you have her help out with serving customers in the bakery, you also have her pitch in and decorate a few cakes and cookies.
Even if you let your sister-in-law decide on her own when she would come in and help you out (A), and she isn’t a baker by trade (C), she is still performing a task (or tasks) that is part of your regular business—baking and decorating cakes and cookies (B). Because of part B, you would likely have to classify your sister-in-law as an employee, even if she was only a temporary employee.
Exclusions and Exceptions of the ABC Test
California AB5 doesn’t apply to every freelancer, gig worker, and independent contractor. There are some notable exceptions to the ABC test. However, these exceptions apply to certain professions under certain circumstances. These professions include:
- Doctors (like surgeons, dentists, psychologist, and even veterinarians)
- Insurance brokers
- Architects and engineers
- Marketing professionals (in some circumstances)
- Travel agents
- Graphic designers
- Grant writers
- Photographers, photojournalists, writers, editors, and cartoonists (are limited to no more than 35 submissions to a single publication a year)
There are other professional categories (like construction and real estate) as well. But, to be considered a part of any category, you must hold the required licenses or certifications in your field.
Not only does an employee have to work in one of the exempted fields, but the job must also pass the Borello test. Similar to the ABC test, the Borello test has 12 factors that an employer must consider when determining employee status. However, unlike the ABC test, the Borello test does not require that a worker meet all 12 factors to be classified as an independent contractor or employee. Each factor is considered independently of the other factors but is considered in relation to the job.
That said, much like the ABC test, one of the key factors in determining worker classification under Borello is whether or not an employer controls the work and how the work is performed.
What’s Happened So Far
In anticipation of California AB5, some companies cut ties with their independent contractors. Vox Media is one such example, laying off hundreds of freelancers ahead of January 2020. However, some companies, like the Los Angeles Times, moved some contractor workers from independent contractor status to regular employee status.
Some freelancers are reporting that they have been unable to find new jobs as companies are hesitant to hire California-based freelancers. Why? Even if a company is located outside of California, if the freelancer is in California, AB5 rules apply, so the non-California company has to apply the ABC test to all freelance hires.
In the meantime, employers and freelancers opposed to AB5 are challenging the law’s constitutionality. Uber and Postmates joined together for a federal lawsuit claiming AB5 is unconstitutional because it targets only some workers and some companies. As of January 4, 2020, Uber and Lyft both announced that they would not comply with AB5.
Two freelance writer groups also filed federal lawsuits claiming that AB5 restricts free speech. However, on January 7, 2020, a judge denied the request for a temporary restraining order, stating that the groups waited too long to file their lawsuit. Therefore AB5 will apply to journalists and writers until the case is heard in March.
And, on January 2, 2020, a judge issued a temporary restraining order blocking the state from enforcing AB5 on truck drivers until their lawsuit could be heard.
What AB5 Means for Freelancers and the Gig Economy
Truthfully, no one knows for certain what the long-term impact of AB5 will be on California freelancers and independent contractors. For example, there are still questions about how California AB5 will impact musicians that play gigs for different venues. If the core business of the venue is providing music, will they have to classify all musicians as employees?
While one court decision stated that large franchises (like McDonald’s) would not have to reclassify franchise owners as employees, the ruling did not necessarily exempt the franchise owner from having to reclassify their workers as employees.
And, while 19 states already used the ABC test for worker classification, it wasn’t widely enforced. However, once AB5 passed in California, other states (like New York and New Jersey) followed suit and have their own “Gig Worker” bills pending in their legislatures.
Even though California AB5 is in effect, things are changing daily. In the meantime, we’ve got lots of advice on freelancing, including which freelance fields pay well, the pros and cons of freelancing, and a guide to freelancing.
And, of course, as a FlexJobs member, you can check out our freelance job listings anytime.
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