AB-5 - California’s New Labor Law Affecting Businesses & Contractors

By: Benjamin Jacob

The future of work is up for debate in Congress and state legislatures across the nation. AB-5 – California’s controversial new labor law went into effect this past January. The new law dramatically redefines the test for whether workers are employees or independent contractors creating a presumption workers are employees. 

The stakes are hard to overstate – businesses face potentially crippling restrictions on their ability to deploy flexible labor.  Some workers are pushing for expanded protections and rights akin to employees, while others protest the new law is out of step with the modern economy and improperly restricts their freedom to choose.

While the situation is complex and much remains to be determined, there is no question this is one of the most important issues to be addressed in order to unlock the best economic opportunities for both businesses and workers.

What is AB-5

AB-5 codified a strict 3-prong test known as the ABC test, under which workers are presumed to be employees unless employers can prove all three of the following conditions are met: 

1. The worker is free from control and direction in connection with the performance of the service, both under the terms of the contract as well as in fact; 

This requirement means if the employer controls the work being performed either through contract or in practice, this prong of the test will not be satisfied. 

2. The service is performed outside the usual course of the business of the employer; and

For this second requirement, the determinative question will be whether the work done by the worker is “routine and necessary” to the usual course of the employer’s business. This is perhaps the most onerous provision facing “gig” economy companies like Uber and Lyft who, for example, may have difficulty showing that drivers using their platform to provide rides is not “routine and necessary” to their business models. This, in part, explains why such companies along with others like Doordash have invested over $90 million in a ballot initiative campaign seeking to carve out an exemption for their businesses.     

3. The worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.  

This requirement means the worker should have their own business regularly doing the work they’re performing for the employer. Here, the Labor Board and courts will examine whether the worker has other clients, uses independent marketing materials, holds a business license and other attributes characteristic of an independent business.

Exemptions

AB-5 carves out exemptions for certain types of workers. It is critical to understand that the exemption does not immediately render the worker as an employee. Below, we’ve highlighted a non-exhaustive list of some of the exemptions and requirements to qualify for the exemptions. 

Workers holding professional or occupational licenses: (Licensed professionals exemption)

    • Direct sales personnel (cannot be paid hourly and must have written contract agreements)
    • Physicians, surgeons, dentists, veterinarians
    • Lawyers
    • Accountants
    • Registered securities broker-dealers and investment advisers

Workers providing professional services (Professional Services exemption)

    • Criteria 
      • Must pass the Borello test and satisfy a 6 factor test
      • Types of professional services:
        • Marketing professionals, Graphic designersHR administrato

Business to Business Contractors (B2B exemption)

    • The business,which can include individuals operating as sole proprietors, must satisfy the Borello test and additional criteria.

What Lies Ahead

Nearly two months in, much remains to be decided on the future of this law both in California and elsewhere where similar versions are under consideration. Democratic lawmakers in California have already acknowledged some of the shortcomings of AB-5 and vowed changes will be coming. As mentioned, major tech companies like Uber, Lyft, Doordash, Instacart have joined forces investing millions into getting a ballot initiative in front of California voters this upcoming November.  The ballot initiative would exempt workers using their platforms from AB-5’s ABC test upending a major objective of lawmakers who championed AB-5. 

As the issue evolves, businesses that rely on independent contractors, particularly those located in California, will need to stay on top of how this develops.

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