If you’re a California-based company or working with California based freelancers, Assembly Bill 5 (AB5) is probably on your mind whenever you work with an independent contractor.
The California bill has changed the way companies and freelancers work together, and many times not for the better.
It all started with the court case Dynamex Operations West, Inc. vs. Superior Court in 2018. The groundbreaking decision threw the freelancing and gig worker scene under the water with the CA court forcing companies to redefine what a freelancer (or employee) is. The court determined that the burden of proof that a worker is not an employee would be placed on the employer, and not on the worker.
The decision sparked the introduction of AB5, the effort to codify the Dynamex court decision and turn it into state law.
Overall, the intentions were good: to stop exploitation of workers by classifying them as freelancers and denying them benefits only employees are entitled for. However, the bill was met with resistance both by companies (mostly with “gig economy” platforms) as well as workers themselves. AB5 went into effect on January 1, 2020 and with it resistance, skepticism and various amendments.
This is part of an extensive series of guides about compliance management.
Workforce classification tests
There are several workforce classification tests that help companies decide if a certain worker is an employee or a non-payroll worker, like the IRS 20-factor test, the Borello test and obviously the ABC test that is used by AB5.
These tests are critical. They are supposed to help companies to avoid employee misclassification, which can have far reaching legal consequences. The problem is that every country, and even state, has different classification tests companies need to follow.
Another problem is that these classification tests can be easily interpreted differently as they are complex and not specific.
The Borello test, also known as “the right to control”, has been around since the 80s and is based on 11-factors to help determine if someone is truly self-employed. For example, does the worker perform work with direct supervision, do they have an impact on other team members, does s/he get paid per job completion or time based, etc.
The IRS 20-factor classification test is quite similar with 20 factors like amount of training provided, control of the worker schedule, requirement of work reports etc. Workers don’t have to meet all of the criteria in order to be considered self employed.
The ABC test is a new workforce classification test created to determine worker status, but it is significantly stricter. It’s a three-factor test in which workers must satisfy all three components in order to be defined as independent contractors.
As we’ve discussed, AB5 determined that the burden of proof for classifying a worker as an independent contractor now falls on the hiring company. This means that workers are considered employees until proven otherwise, forcing many companies to hire an entirely new workforce, a problem for many.
California Assembly Bill 5 Exemptions
When the law was first published, it included an exemption list with more than 100 professions. The list included doctors, dentists, insurance agents, lawyers, accountants, real estate agents, hair stylists, and others.
The relevant classification test for these professions remained the Borello text and not the strict ABC test and the main determining factor is if the hiring company controls the worker in terms of the work done and the way it is performed. As discussed above there are also other considerations involved.
Many freelance unions and groups have appealed to get into the exemption list as they were worried companies would not continue to hire their members as freelancers or because their freelancers didn’t want to become employees. Additionally, companies that rely on gig-workers or freelancers also tried to achieve exemption status in order to continue their work in the same manner.
Various lawsuits have been brought before the courts in an effort to update the AB5 exemption list. The most famous of which are AB2257 and Proposition 22.
AB2257: Giving creatives the freedom to create
AB2257 was signed on September 4, 2020 by CA governor Gavin Newsom.
It added a whole new set of exemptions for freelancers. These include creative professionals such as writers, photographers, videographers, photo editors, illustrators and cartoonists.
It also, more importantly, eliminated some of the criteria to be considered a creative freelancer, such as submitting less than 35 pieces of content per year.
After AB2257, there were 109 categories of workers who no longer need to qualify for the ABC test to be considered independent contractors or freelancers.
Proposition 22 – Gig drivers
Let’s put it this way: companies that are based on hiring gig workers, such as Uber, Lyft and DoorDash were not happy by any means with AB5. They refused to acknowledge the new law demanding that they classify their drivers as employees. This was obviously a bit of a disaster, as they were now responsible for a wide range of benefits afforded to employees only.
So what did they do? They spend millions of dollars to push a correction to exempt gig drivers from AB5. They explained to the public that the law was bad and that in the end it would cause them to raise prices significantly. That correction is called Proposition 22.
In November 2020, Proposition 22 was added to the California ballot. It was passed by the California voters, reversing efforts to force gig workers to be considered employees. Many of the workers themselves voted “yes” as they were afraid that forcing the companies to hire them as employees would lead them to losing their jobs.
Prop 22 did make sure that the gig workers in these companies would still receive certain benefits. These include a guaranteed minimum hourly wage, health insurance subsidies, medical and disability coverage, and more.
Can Prop 22 and AB5 coexist?
The answer is yes… kind of.
Although AB5 (technically renumbered as AB 2257) will live on, the companies it was aimed at are no longer compelled to comply with its primary provision.
Following the passage of Prop 22, rideshare drivers and delivery service providers that work for Uber, Lyft, Doordash, and other Delivery Network Company companies can remain as independent contractors instead of employees.
By exempting these companies categorically, Prop 22 essentially guts AB5 of its original intent.
Meanwhile, freelancers who perform other types of work will be reclassified unless they meet the requirements for exemption under AB 2257.
AB5 will continue to evolve over time
The initial idea behind AB5 was a good one: to protect weak workers against companies and enterprises to ensure they received their benefits. The CA government also wanted to make sure that they were receiving the proper taxes from these freelancers by having companies make payments at the source.
The problem is that AB5, especially after Prop 22, is doing the exact opposite. It’s hurting freelance workers who have the knowledge and power when working with companies. And therefore, the question must be asked: is it really needed?
If there’s anything clear about AB5, it’s that it is constantly changing and being updated. That’s no surprise after the massive resistance that was met after it was introduced.
The introduction of AB2257 and Prop 22 changed the game for AB5. With the addition of so many exemptions and changes along the way, the original intent of AB5 (now actually AB 2257) has been derailed. And the confusion surrounding who is exempt, who needs to pass each test and who doesn’t, doesn’t make the situation any easier.
All of this together with Joe Biden and Kamala Harris’ plans to aggressively tackle employee misclassification on a federal level, means that the future for AB5 will be interesting.
What does the future hold? It’s unclear at this point. We hope that it will continue to evolve until the right balance is found. Whatever it is, we’ll keep you updated here at Fiverr Enterprise.
See Our Additional Guides on Key Compliance Management Topics
Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of compliance management.
- Worker Classification: The How-To Playbook
- FLSA Classification: Who is Exempt and Why Do You Need to Know?
- Employee Misclassification 101: What You Need to Know