California AB5 Explained: Classifying Employees as Employees or Independent Contractors

With the evolving landscape of employment across the United States, the government has taken a more diligent approach to the way companies classify the people who work for them. Are companies hiring actual employees or are they bringing on independent contractors to fill gaps and produce work for the company?

Earlier this year, we took a wider view of this issue when considering how the federal government approaches the topic. However, for workers and businesses in California, it’s crucial to look at state-level legislation. We’re diving deeper into California Assembly Bill 5 (AB5), which went into effect on January 1, 2020, offering a closer look at its implications for businesses and workers alike.

Establishing the ABC Test for California Employment

One of the crucial elements of AB5 is the codification of “the ABC Test” to determine the classification of a new hire. The passage of AB5 came on the heels of a ruling by the California Supreme Court in 2018 through Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. In that case, the court ruled in favor of the three-pronged test to decide whether a worker is an employee or contractor. The test requires three conditions to be considered: 

  1. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Expansion of Employee Status to Gig Workers

The biggest immediate impact at the time of AB5’s passage was the expansion of protections to include “gig workers” in California, affecting drivers for companies like Uber and Lyft. These companies faced orders from the California Superior Court to reclassify their contract drivers as employees. This classification entitled them to a range of benefits including workers’ compensation, unemployment insurance, and health insurance, enhancing their protection and benefits significantly.

Exceptions to California AB5

Despite the initial broad application of AB5, the state legislature introduced Assembly Bill 2257, which carved out numerous exceptions. However, gig workers like Uber and Lyft drivers did not receive exemptions. Professionals such as photographers, freelance writers, translators, licensed physicians, lawyers, accountants, and musicians did. Even if employees fall within an exemption, they must past the “Borella Test”, named after the famous case S. G. Borello & Sons, Inc. v. Department of Industrial Relations.

Despite losses in both AB5 and AB2257, Uber and Lyft eventually led a successful campaign to pass Prop 22 in California. This initiative, surviving multiple appeals, has effectively allowed these companies to continue classifying their drivers as independent contractors, sidestepping AB5’s requirements.

Classify Employees with Confidence

Trying to navigate these nuanced rules for classifying employees in California demands up-to-date legal support. At Dahl Law Group, we work closely with companies to help them chart these waters with confidence. By staying current on the latest legal developments, we will ensure your company is able to classify employees correctly, protecting your business from any legal complications down the line. Contact us to ensure your business thrives under the current laws in Northern and Southern California.


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