AB5: What It Is and How It May Affect You

What is AB5?

New bills and laws are passed frequently that affect the inner workings of businesses, and small businesses in particular. One such law is California’s AB5 (California Assembly Bill 5) and is commonly referred to as the “gig worker bill.” Because the law is only in place in place in California, you may be thinking this article doesn’t apply to you, but think again: other states often follow the example of adopting refined business statutes, and the rules of AB5 could soon be finding its way into your state legislature. 

Of course, you may be wondering what AB5 is and what it entails. This law—which came into effect in California as of January 2020—makes it a legal requirement to now classify independent contractors as employees. There are a few exceptions, which will be explained, but the majority of people previously classified as independent contractors for a company now need to be considered official employees of the company. 

AB5 is important to understand, as it can create financial and personal liability for those not aware or those that ignore the law. 

Why is AB5 necessary? 

There are a few reasons AB5 was passed, a major one being tax efficiency. Previously, independent contractors were responsible for keeping track of their income and how much to pay in taxes instead of getting an employee W2 that makes filing taxes much simpler. The state sought to make the lives and business practices of independent contractors easier by passing AB5 and allowing them to receive a W2 from the business they provide services for.

Another important reason AB5 was passed is because independent contractors were missing out on the same benefits as official employees, including health insurance, paid sick or family leave, and more. Additionally, the rising prominence of the “gig economy” (work done in the form of task fulfillment) has prompted legislators to seek extra protection for gig workers. This has particularly impacted popular apps such as Uber and Lyft, who were previously able to dodge paying the usual costs of official employees. 

What are the AB5 exemptions?

AB5 includes a useful way to determine what independent contractors do not need to be classified as employees. It is known as the ABC test. 

The new law requires you to classify independent contractors as employees unlessall three of the following criteria are met, in which case they may remain considered independent contractors: 

A. The individual is free from the control and direction of the company in performing work, both practically and in the contractual agreement between the parties.

B. The individual performs work outside of the usual course of the company’s business.

C. The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.

Many agree that the third stipulation (C) is the most relevant and important to recognize, although each stipulation needs to be addressed. An easy way to think of rule C is: does the worker have their own business, and do they offer services to any other businesses besides yours? If so, they are almost definitely an independent contractor. 

Hopefully, this article has helped simplify AB5 as a law, and you will be able to apply knowledge of who is exempt to better your business.