Assembly Bill 5 or AB5 makes it harder for companies to label workers as independent contractors.
This new law does not just apply to Uber and Lyft drivers. It drastically impacts all industries who rely on independent contractors for staffing needs.
The first major change is the new law assumes workers are employees. To prove otherwise, the hiring company has the burden of demonstrating that the worker meets a very specific test.
Namely, a worker can only be classified as an independent contractor if the company can show the worker meets all three of the following prongs:
- 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.
Prong B will be the biggest obstacle for most hiring companies.
For example, if the worker is performing work that is integral to the hiring company’s business, then they will be classified as an employee. It will be incredibly difficult for most companies to prove a contractor isn’t doing work for the core of their business.
Most businesses attempting to hire workers in an area related to their product or service—whether to supplement their workforce, expand to new geographies, or even provide a distinct component of a process necessary to create the goods or services—will likely be in violation of the law, if they treat the workers as independent contractors instead of employees.
Additionally, even if the hiring company can show the worker is not performing work within the usual course of the hiring company (Prong B), the company would still have to show that the worker was free from the company’s control (Prong A) and that the worker has an independently established business or provide services to other companies (Prong C).
A hiring company’s evaluation of whether a worker is properly classified as an independent contractor under the new law will be dependent on these specific factors and these factors may change over time.
The new law does carve out exemptions for certain industries, but that list is limited and is not a blanket exemption. Even “exempt” hiring entities must still meet nearly a dozen other specific requirements in order to show their independent contractors are not actually employees.
This new law will go into effect January 1, 2020. Companies should start preparing now for the new risks and regulations associated with AB5.
How Staff Management Can Help
Working with a staffing company, such as Staff Management | SMX, will eliminate the risk of misclassifying your workers under the new law. By partnering with us, Staff Management would take on the cost and burden of employing a compliant workforce.
Partner with an organization that has expert knowledge of the regulatory landscape, and that’s ready to pivot while recommending solutions and policies that meet any new regulations, including AB5.
Contact us today to discuss your options.