California governor, Gavin Newsom signed a new law on September 18, 2019, that will affect the classification of contract workers as employees.  The bill, California Assembly Bill 5, also know as the “Gig Worker Bill” or the “Uber Law”, has a large focus on companies that utilize gig type workers such as Uber, Lyft and Doordash drivers in California, however, it has a much larger impact than that with the potential to affect millions of independent contractors in nearly all types of companies, even some outside of California.  AB 5 will turn many gig workers into regular employees, many of these jobs outside of companies such as Lyft, Uber and Amazon drivers.  Trucking companies, newspaper publishers, cleaning and janitorial services, landscapers, and manicurists are examples of trades that will be greatly impacted by Assembly Bill 5. 

The law will go into effect January 1, 2020.  The main goal of AB 5 is to ensure that workers are entitled to greater labor protections such as minimum wage, sick leave, unemployment and workers compensation benefits and other full employee benefits.

AB 5 Will Make The “ABC Test” California Law

Once AB 5 is in effect, California workers will be considered employees of a business unless the employer can show the work they perform meets a detailed set of requirements.  The criteria set forth by the California Supreme Court in April 2018, says employers are responsible to utilize the three-step “ABC Test” to determine if a worker can be classified as an independent contractor.   Employers will be required by law to expand classifications to all provisions under the state Labor and Unemployment Insurance codes.

The ABC Test Criteria:

(a) the worker is free from control and direction in the performance of services; and
(b) the worker is performing work outside the usual course of the business of the hiring company; and
(c) the worker is customarily engaged in an independently established trade, occupation, or business.

What is an Independent Contractor?

As defined in Assembly Bill 5, an independent contractor is someone who operates an independent business; who is hired by a company to do something outside of that company’s usual course of business; and who has full say over how, when and where they complete this job.

Many businesses have moved to classifying workers as independent contractors in order to reduce labor costs and avoid costly benefits such as health care, paid sick and vacation time, and retirement plans.  Unfortunately, many employers often misclassify these workers. 

What does this mean for businesses?

The bill has the potential to change the employment status of more than 1 million low-wage workers in California. It will make it harder for gig economy companies to prove their workers aren’t staff, while ensuring key benefits and protections, like minimum wage, insurance and sick days.

AB 5 has received extensive opposition from gig economy companies, as it could disrupt their traditional business model of hiring inexpensive contractors. In an effort to push back against the bill, Uber and Lyft proposed establishing a $21-an-hour minimum wage for drivers in California. The ride-hailing companies, as well as Doordash, have also pledged $90 million on a ballot initiative for the 2020 election that would exempt them from AB 5.

Other industries such as healthcare and trucking companies have also voiced concerns and pushback, arguing that AB 5 will rewrite the rules for independent workers, a status that has worked for them for decades.

“AB 5 does not take into account the more than 70,000 California truckers who have built their business around the independent owner-operator model, invested hundreds of thousands of dollars in their trucks and have made the decision to run their own businesses,” Shawn Yadon, CEO of the California Trucking Association, said before the bill passed.

Healthcare and hospitals are also worried AB 5 will not only cause confusion, but will have dire consequences of delaying patient care.  Gail Blanchard-Saiger, vice president of labor and employment at the California Hospital Association, said “Although doctors, psychologists and podiatrists are exempt from AB 5 and hospitals employ more than 90% of their workforce, many medical professionals such as physical therapists and certified registered nurse anesthetists are contracted at small and rural hospitals where volume is low.  The impact on the hospital for these health professionals is probably a delay in services and in particular rural communities maybe a reduction in services.”

Other health professionals not exempt under AB 5 are: occupational therapist, speech therapist, optometrist, nurse practitioner, physician assistant, radiation therapist, licensed professional clinical counselor, marriage and family therapist, licensed clinical social workers, respiratory therapists, audiology.  All of which will be impacted by the new law.

Who IS exempt?

Some professions are exempt from AB 5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents, as they are seen to generally directly work with and set their prices to customers.  Licensed hairstylists, manicurists, cosmetologists and barbers that set their own rates and schedules won’t change. Commercial fisherman are exempt until 2023. Tow truck drivers affiliated with the American Automobile Association are also exempt. Freelance writers, grant writers and photographers can continue provided they don’t submit more than 35 submissions to an outlet a year.

What about ineligible workers?

One of the most significant issues that will quickly arise from AB 5 is that workers that were once exempt from having to go through the I-9 form process because they were classified as independent contractors, will no longer be allowed to do so once they are classified as employees.  This is the “show your passport or social security card” process.  The question is, how will California handle tens of thousands workers that are suddenly turned away from gig economy companies because they are not able to meet I-9 requirements?

Don’t panic – just be prepared!

Although there are many reasons to be concerned about the impact California businesses will feel once AB 5 is in effect, the best thing to do is to get prepared.  Being prepared is your best plan to avoid potential risks to your operations.

Assess your risks:  Work with your Barkley Risk Management expert to do an audit of independent contractor management processes.  It is imperative to include every step of your operations that involves independent contract workers.  You need to understand everything that is and is not compliant.  From here, you can prepare for how you will adjust and rewrite your processes to comply with the new law, with the least amount of disruption to your business.