The bill was designed to strengthen regulation of companies that hire gig workers in large numbers, including DoorDash, Shipt, Postmates, Uber and Lyft. Companies must use a tripartite test to show whether workers should be classified as independent contractors or employees. This doesn`t just affect employers and employees. As the LA Times noted, „wrongly classifying workers as independent contractors costs the state about $7 billion in payroll taxes each year.” AB 5 provides that workers in certain occupational classes have been exempted from the ABC test and uses another method to determine whether workers in these classes qualify as independent contractors. Under California labor laws, workers are exempt in the following areas: The article cites a 2016 study by economists that estimates that twelve and a half million people, or 8.4 percent of the U.S. workforce, are now considered independent contractors. California Assembly Bill 5, or AB 5, is a piece of legislation passed by Governor Newsom in September 2019. The new law came into force on 1 January 2020. AB 5 requires companies to reclassify independent contractors as employees, with few exceptions to the rule.
In 2005, two of Dynamex`s drivers filed a class action lawsuit alleging that they and other drivers had been falsely classified as independent contractors and that Dynamex had therefore violated various requirements of the California Labor Code and state wage orders. In adopting AB 5, California included the „ABC test” for employee status, which was established in state law by the California Supreme Court in 2018 in its decision in Dynamex Operations West, Inc. v. the Los Angeles Supreme Court. The ABC test is a California labor law that determines whether an employee is covered by California wage orders and the Unemployment Insurance Code. According to the ABC test, an employee can only be classified as an independent contractor if they meet the following conditions: Independent contractors are different from traditional employees, which has led to California laws for independent contractors. They engage in business activities as an independent entity and include roles such as graphic designers, freelance writers, construction workers, consultants, etc. Persons classified as independent contractors are not employees of the hiring company. While there are several benefits to working as an independent contractor, you are also responsible for paying your benefits, withholding Taxes on Social Security, and providing supplies to carry out the projects for which you were hired.
Since the financial burden falls on the independent contractor, it is too easy for illegal companies to abuse the legal system. The Independent Contractor Reporting Program is designed to find parents who are not meeting their child support obligations. Companies operating outside of California are also subject to this law. For example, an independent contractor working in California for a Texas-based company must be reported to California ESD. Workers who have been wrongly classified as independent contractors and who should have been classified as employees have the right to recover all benefits to which they would have been entitled if they had been properly classified. See Labour Code § 2802 (a). All companies and government agencies that hire independent contractors must submit reports to the State Department of Employment Development. To determine whether or not an employee is an independent contractor or an employee in California, it is important to see to what extent a company has control over the employee. The greater the control, the greater the likelihood that the employee will be classified as an employee. On the other hand, the greater the independence, the greater the likelihood that the person will be an entrepreneur. According to an article in the Los Angeles Times, hiring workers as independent contractors has recently „exploded.” For example, independent contractors not only have to pay their own payroll taxes and taxes for the self-employed, but they are also responsible for all other direct and indirect costs of conducting the business themselves, as well as the risks and liabilities associated with their work. While each state has its unique policies that determine an employee`s status, California`s passage of Assembly Bill 5 includes specific tests that employers must perform when it comes to classifying employees.