Two Reasons Why AB5 is so Controversial
3 minute read:
On its face, Assembly Bill 5 (“AB5”) codifies a seemingly straight-forward analysis for employers to determine if their workers are 1) employees, or 2) independent contractors. This test is commonly known as the “ABC” test and contains three elements. In the state of California, workers are to presumptively be categorized as employees as of January 1, 2020, unless the following conditions are satisfied:
(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Despite its apparent simplicity, the fallout subsequent to the adoption of the ABC test has been tremendous, including multiple lawsuits from industry groups and businesses, as well as an upcoming ballot initiative by gig economy companies such as DoorDash and Lyft seeking carve-outs from AB5’s reach. Here are two reasons why this law is so controversial.
1) AB5 Contains Exemptions for Certain Industries but Not Others
AB5 does not apply equally to all businesses, with significant disruption to the established business models of some, but not other, companies. On one hand, the law is intended to protect against the misclassification of workers, which the legislature notes “has been a significant factor in the erosion of the middle class and the rise in income inequality.” On the other hand, classifying workers as employees can add significant costs to operations, including taxes on Social Security and Medicare, insurance for unemployment and disability, minimum wage, sick leave, overtime, and other protections. Many industry groups argue the burdens of the new law were arbitrarily distributed.
For example, the ABC test does not apply to commercial fishermen, certain types of truckers, creative content marketers, human resource administrators, lawyers, architects, engineers, private investigators, and accountants, among other professions. (These occupations are governed by another test, handed down by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, a post for another day). Noticeably absent from the ABC test’s exemptions are the businesses actively fighting the new law: gig economy companies.
For now, the legal fights for more exemptions are ongoing. Uber and Postmates filed suit against the state of California on December 30, 2019. A business employing court reporters also sued the state on January 16, 2020. Freelance journalists have done the same. Uber, Lyft, Doordash and others have spent millions on an anti-AB5 ballot initiative to be placed on the ballot in November 2020.
2) Variations in State and Federal Laws Create Confusion for Employers
Only several states in addition to California, such as New Jersey, have adopted the ABC test, creating a patchwork quilt of federal and state compliance. One area generating significant confusion amongst employers is the overlay of AB5 with the federal Affordable Care Act (“ACA”). Not surprisingly, the ACA does not utilize the ABC test to determine who is an “employee.” The IRS’ proposed final rules under the ACA’s Employer Mandate adopt the “common law standard.” According to the IRS, “under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.” While this standard runs parallel to the “A” element in the ABC test, it does not take into account the “B” and “C” prongs. This could lead to a scenario where a worker is considered an independent contractor under federal law (e.g., worker is free from employer’s control), but an employee under state law (e.g., worker performs work that is the same as the employer’s usual course of business).
What Should I Do?
Employers not subject to an AB5 exemption should continue to monitor the legal fights to determine whether their respective industries will be impacted.
Employers struggling with divergent federal and state requirements should partner with experts in data, regulations and analytics, and software. These three elements make up the Triangle of Trustsm. Click here to learn more.
To learn more about ACA compliance in 2021, click here.
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