A new labor law went into effect in California at the start of the year that says employers in the state must hire workers as employees, not independent contractors, giving freelancers and gig workers the same protections and benefits as their full-time counterparts.
While supporters of the bill say companies have been exploiting contract workers, some industries are pushing back. Employers Uber and Postmates filed a legal challenge before the bill became law claiming a violation of constitutional rights and discrimination against tech platforms and their workers. Uber, Lyft and DoorDash have launched a ballot measure asking voters to give ride-sharing companies an exemption to the law. Additionally, a federal judge issued a temporary restraining order that blocked California from enforcing Assembly Bill 5 on the trucking industry.
Businesses are concerned about this as a misclassification of independent contractors, which can cause legal issues and financial ramifications. Paul Kramer, director of compliance at WorkForce Software and an employment law attorney, spoke with Employee Benefit News to discuss the new law — and the pushback from some employers.
What is AB5 and what does it mean for employers?
Generally the purpose of this law is to protect workers and give them benefits that perhaps should be required. Under AB5 it is presumed that every California worker is an employee unless the hiring entity establishes that the worker meets the three criteria of the ABC test, or falls under one of the laws exemptions.
The ABC test requires that A) the worker is free from the company’s control and direction regarding the performance of the work, B) the individual must be performing work that is outside the company’s primary business, and C) the worker is regularly engaged in an independently established trade that is similar in nature to the work that is being performed. The reason they do that is because employees are entitled to certain protections that independent contractors generally are not. Employees must be paid a minimum wage and overtime, given sick leave and be provided with health insurance...but employers don’t have to provide those things for independent contractors.
What would be a downside?
A lot of the time when you are an independent contractor you have a lot more freedom in what you do — your work hours and things like that. The worker would lose some of that under the ABC test.
Why are some employers pushing back against this?
All of the added protections and benefits for employees could become more costly for those companies. Overtime, minimum wage, health insurance, things like that could be more costly for those companies to employ their workers as opposed to having them as independent contractors.
What steps should employers who use independent contractors take now that this law is in place?
First, they should conduct an audit to determine how many workers may be affected by the ABC test. Then examine the realities of the relationship, such as the level of control that can be exerted over the contractors, the services provided by the contractors and whether the contractor has taken the proper steps to establish an independent business outside of what they’re doing for the company.
The reason they’d want to do that is really to see the feasibility of making these contractors employees. So for example are there going to be any additional costs to the company if these workers are now employees? There could be a direct cost like increased hourly wages or increased salary and an increase to the cost of benefits. There could be overhead costs such as human resources support or getting employment practices liability for the worker or recruiting and training costs. Employers are going to have to look at all of these additional costs if these workers are employees, but there are also savings they’ll have to look at too including a lower rate of pay and decreased turnover.
