What is AB-5?

On September 18, 2019, California Governor, Gavin Newsom, signed Assembly Bill No. 5 (AB-5), which went into effect as of January 1, 2020, setting a new standard for determining whether workers should be classified as employees or as independent contractors.

AB-5 has caused a lot of confusion and disruption to the small business community, and this confusion may lead to long court battles. UBER and Lyft, the top 2 ride-sharing companies in the US, are committed to spending up to $90M to fight this bill, and plan to bring an initiative ballot to the next election. Although this bill seems to target the gig economy, like ride-sharing, food service delivery and freelancing, in actuality it impacts every business operation in California, no matter how big or small.

Why should I care about AB-5?

Most workers are presumed to be employees. However, under AB-5, if a hired worker’s answers are ‘yes’ to all three questions on the ABC test, then they are considered an independent contractor. So, if you have a business that is operating in California, and you are planning on hiring, you must ask and document the answers to the ABC test for each new hire. Those questions are:

ABC Test:

1. Is the worker free from control and direction as far as the work being performed? For example, do you supervise, oversee, and approve the work produced?
2. Does the worker perform a service outside the usual course of your business? For example, a dentist hiring a hygienist, or a general contractor hiring a plumber.
3. Is the worker established as a business of the same nature of work that he or she is hired for? Do they have their own company, serving other clients, etc.?

Am I exempt?

The ABC test has produced a challenging tax situation for businesses and workers. Within its specific rules, AB-5 does include some exceptions. These exceptions specify a list of job categories that are exempt from the ABC test. However, all workers in all job categories must pass the Borello Test, which is similar to the Right of Control Test used by the IRS, to be classified as independent contractors (ICs). Examples of ICs include: psychologists, doctors, dentists, insurance agents, podiatrists, stock brokers, lawyers, accountants, engineers, veterinarians, direct sellers, real estate agents, hairstylists & barbers, aestheticians, commercial fishermen, marketing professionals, travel agents, graphic designers, grant writers, fine artists, enrolled agents, payment processing agents, repossession agents and human resource administrators.

It is important to notate that although being an employee whose job requires licensing, this alone does not automatically exempt them from AB-5. The Borello Test serves as a guideline as to whether a professional is considered an employee or are an independent contractor.

What should I do?

Documentation is key. Misclassifications can result in additional 41.5% of taxes, penalties, and interest. The time is now to have your job offers and employment contracts reviewed by your business employment attorneys.