California Assembly Bill AB-5 requires a hiring party to prove whether a worker is an employee or an independent contractor, with the default assumption being that the worker enjoys the full rights of an employee unless proven otherwise. This is a highly significant move, because employees enjoy far greater legal rights than independent contractors do. AB-5 greatly adds to the risks incurred by businesses when they hire an independent contractor.

Background: The “Gig“ Economy

The emerging “gig” economy is a pattern of hiring in which workers are hired for short-term projects as independent contractors rather than as employees. Independent contractors may be paid by the hour or by the job, but they have little job security and few benefits. In a very real sense, the “employer” is simply a client of the independent contractor. This status allows businesses to evade many of the protections that employees enjoy under California labor law.

The gig economy is booming like never before. According to the US Bureau of Labor Statistics, 55 million people, or more than a third of the workforce, participated in the gig economy in 2017 – many of whom relied on it for most or all of their income. Typical “gig” workers include:

●       Freelancers;

●       Consultants;

●       Professionals; and

●       Temps.

The Difference between an Employee and an Independent Contractor

In terms of benefits, the primary advantages of an employee over an independent contractor are:

●       An employer withholds taxes, while an independent contractor is responsible for his own taxes.

●       By and large, employment and labor laws do not apply to independent contractors. In most cases, that means no overtime pay, no paid vacations, no retirement plan, and no paid sick leave.

The traditional way of distinguishing between an employee and an independent contractor is to measure the degree of independence the worker enjoys from the hiring party. A plumber you hire to fix your sink is a classic example of an independent contractor. In other cases, the distinction is more blurred and uncertain.

What AB-5 Does

Once a worker is classified as an employee, employment and labor laws kick in to protect the worker. What AB-5 does is adopt the “ABC test” as a means of distinguishing an independent contractor form an employee and place the onus on the hiring party to either establish that the worker is an independent contractor or grant him all of the benefits of an employee. In a nutshell, the ABC test establishes that the worker is an independent contractor if:

(A) The worker does not take direction from the hiring party in terms of how to do his job. Think of the plumber example above.

(B) The worker’s job is outside the hiring party’s scope of business. Imagine a software company calling a plumber to unclog its toilet, for example.

(C) The worker regularly engages in the type of work that the hiring party has called him to perform.

If the worker cannot be classified as an independent contractor under the foregoing ABC test, AB-5 requires him to be treated as an employee under California’s Labor Code, the Unemployment Insurance Code, and California’s Wage Orders. This requirement could greatly expand the benefits available to workers in the gig economy.

Certain occupations and business relationships are exempt from AB-5 – insurance agents, doctors, and certain types of business-to-business relationships, for example.

We Can Help You Mitigate Your Business Risks

Doing business in California entails a significant degree of legal risk. Although not all of this risk can be avoided, a lot of it can be minimized or even structured in such a manner that it will work to your advantage. Contact CKB Vienna today at one of our offices in Rancho Cucamonga, Riverside, and Los Angeles, or complete our online contact form to schedule a consultation with us.