AB 5: What is it, and Does it Affect My Business?

February 28, 2020 | By:Neilson Marketing Services

California Assembly Bill 5 directly impacts the way companies recognize those who work for them. This bill is better known as AB5, and it sheds a little more light on and tightens the definition of “independent contractor”. It requires employers to conduct ABC tests to determine whether or not their workers should be classified as full-time employees. The bill minimizes the amount of work that is permitted to be conducted by freelancers and contractors without being considered full-time employees. The whole reason for this bill is to prevent employers from taking tax shortcuts and to provide those workers who should be classified as employees with proper healthcare, workers’ compensation, paid time off, and all their other rights. This regulation forces companies such as Uber, Lyft, or other businesses that rely on contractors to continue to operate in California to adapt their employment systems accordingly. However, there are certain exemptions to the rule. Make sure that you and all your business operations are in compliance with AB5. 

How it Works 

AB5 turns independent contractors into employees. According to Investopedia, the key factor for gig companies is that anyone performing work for a company that is the same as the business of that company is considered to be an employee. Under the new bill, if employers begin classifying gig workers as employees, it means these workers will be entitled to a minimum wage, expense reimbursements, employee benefits, rest breaks, and the other benefits afforded to employees under California state law. Therefore, the bill creates a level playing field between gig economy workers and those hired as regular employees.

However, there are possible pitfalls if gig workers are treated as employees,  because they will be expected to adhere to a new set of standards regarding how they perform their work. For example, one major appeal of being a driver for a ride-sharing or delivery company is the ability to choose when and when not to work. As an employee, a former gig worker no longer has that flexibility. Typically, those who start this type of work are attracted to the freedom and more inclined to drop out, as they may not like fixed schedules or other regulations. 

Over 50% of professions and types of businesses are exempt. Companies that are not exempt must consider how they classify employees and independent contractors to ensure that they’re not violating the terms of the bill. For companies that do reclassify gig workers as employees, the ease of transition is based on expense. If companies now have to pay a minimum wage, offer paid time off and health insurance, and pay unemployment insurance and worker’s compensation benefits for this new crop of employees, that may greatly impact bottom line. If these types of companies want to preserve their profit position, then the additional costs of reclassifying will likely be passed on to the consumers who use their services. The bill and the issues surrounding it are constantly evolving; so keep in mind that circumstances can change at any given date.  

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