CA AB-5 Independent Contractor Update

Covid-19 has changed everything for everyone, including independent contractors. Independent contractors are professionals who control the type of work that they do and how it is done. They are paid by clients or employers who hire them to complete a project but do not hire (or pay) them as an employee. Independent contractors enjoy an elevated sense of control and freedom in their work, but they are also responsible for handling their taxes and do not receive the same benefits as an official employee.

In 2019, Governor Newsom approved a new law, CA AB-5 that required companies that hire independent contractors to reclassify them as employees, with a few exceptions. Employers are required to classify those who work for them as employees unless they meet all three conditions of the ABC Test. A worker is considered an independent contractor if:

1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

2. The person performs work that is outside the usual course of the hiring entity’s business.

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

These changes were designed to help the thousands of Californians who are classified as gig economy contractors with the protection and security that employees have. This started as a way to protect those who work in the food delivery and ride-sharing services but has expanded to photographers, freelance writers, and engineers.

AB5 was designed to give independent contractors a fair wage, benefits, wage protections, and even breaks.

CA AB-5 Independent Contractor Exemptions

The original law offered exemptions for specific industries including doctors, real estate agents, hair stylists, dentists, and insurance agents. The updated law included more exemptions, including:

● Freelance writers

● Still photographers and photojournalists

● Newspaper cartoonists

● Translators

● Youth sports coaches

● Copy Editors

● Cartographers

● Musicians with single-engagement live performances

● Musicians involved in sound recordings or musical compositions

● Manufactured housing salespersons

● Landscape architects

● Professional foresters

How AB-5 Impacts California Employers

Many small and midsize California businesses have been able to grow because of independent contractors. Hiring independent contractors has been a cost-effective option to access affordable labor without the strings attached. Independent contractors don’t require training or onboarding, do not have to be paid the same as employees, and don’t cost the employer anything in terms of benefits. It makes a lot of sense for California businesses to use independent contractors, but this new legislation makes it harder to do so. The switch from independent contractors to employees will significantly increase their payroll and HR budget.

Employers have a few options to adjust to these new regulations. They can use a Los Angeles staffing agency to help them hire temporary workers, or they can make the hard decision to lower wages and pay less than other companies in the market. They may also have to reduce the number of people who work for them.

A judge in California has ruled that the law can not impact truckers, and major ridesharing services have filed lawsuits. It is still uncertain how the updated CA-AB5 policies will impact California businesses moving forward.

How Ab-5 Impacts California Workers

For the millions of workers in California, CA AB-5 comes with its pros and cons. While the law helps independent contractors reach a new level of stability and protection, it also takes away a lot of the flexibility and control in how and when they work. This flexibility is one of the biggest reasons independent contractors choose to classify this way and being considered an employee means they lose a lot of that freedom. This policy creates a more level playing field for gig workers and regular employees and gives independent contractors the perks that they were previously missing out on. However, the reclassification means employers will have to pay their workers more, and this expense almost always trickles down to the consumer.

What’s Next For Independent Contractors?

There are still questions about how AB-5 will impact retirement for California workers and how the law will be executed. There is pushback from big companies who rely heavily on independent contractors, and the law comes at a time when the employment climate in California is still unsteady.

Many California businesses are using staffing agencies to help them find top talent in uncertain times as well as offset the burden managing the payroll complexities of a fluctuating workforce. Hiring temporary workers could be a solution to finding qualified professionals who are not direct employees but aren’t independent contractors either.

Want to learn more about cost-effective hiring practices amid these changing laws? Connect with a Los Angeles staffing agency today!