Assembly Bill 5 (AB5), which addresses employee classification, becomes law in California on January 1, 2020. This law implements a new test for employers to use to determine if a worker is an independent contractor for the purposes of the Labor Code, Unemployment Insurance Code and the Industrial Welfare Commission (IWC) wage orders. The law will also apply to Workers’ Comp coverage as of July 1, 2020.
AB5 sets a new “ABC Test” for determining a worker’s independent contractor status, which is intended to be easier and more predictable for employers and workers. Under the new law, a worker is considered an “employee” unless they meet all three conditions to be classified as an independent contractor. The three conditions are:
- The worker 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; and
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
While a majority of employers and their workers will need to meet these conditions, there are a few exceptions that would need to follow the multifactor Borello test, including:
- When the Legislature or IWC has defined an employment relationship in a certain way;
- When a court determines the ABC test cannot be applied; or if the occupation or contracting relationship is specifically exempted.
More information on the ABC and Borello tests, exemptions and requirements under AB5 is available at https://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm.
California-based companies should take these actions:
- Determine which workers are now classified as independent contractors.
- Review the list of exemptions to determine if you must apply the ABC test or the Borello test.
- Examine carefully each worker’s actual job duties, expectations, control, supervision, etc. applying the applicable test.
- If applying the “ABC test,” be sure workers meet all three conditions to be classified as an independent contractor.
- If you need to reclassify a worker from an independent contractor to an employee, be sure to update your records, get the employee on your W-2 payroll, and be sure the employee is covered by unemployment and Workers’ Comp as well as other state benefits.
- If there is a question about the worker’s classification, it is best to default to “employee” as it is usually more beneficial for the individual.
This information was provided by PPAI’s affiliated human resources partner, Affinity HR Group, Inc., a company specializing in providing human resources assistance to associations, including PPAI and its member companies. The company is available to answer questions about this and other HR-related issues for any PPAI member company at www.affinityHRgroup.com.
Used with permission from PPAI Publications