California recently passed AB5, a law that changes how workers are classified.
AB5 establishes an “ABC” test to decide whether or not a worker is an employee or a contractor. The law starts with the assumption that everyone is an employee. To be considered an independent worker, a worker must:
Be free of the hirer’s control; and
- Do work that is “outside the usual course of the hiring entity’s business”; and
- Be established in a trade similar to the work being performed.
This is a more stringent set of rules than was in place prior to AB5 (for those interested in legal geekery, the prior rules are referred to as the Borello factors).
Many are suggesting that AB5 will result in the end of the gig economy and gig work.
This is not correct.
First, AB5 has a long list of professions that are exempt from the law (see the end of the article for the list).
We’re still crunching the numbers, but based on the work we’ve done so far we think well over 50% of all independent workers in California fall under the exemptions.
Second, many gig economy companies (Uber is a good example) are claiming their independent contractors pass the ABC test. So until the courts say otherwise, independent workers associated with these firms will remain contractors.
Also, many industries and professions are still clamoring for exemptions. And since both the California legislature and Governor have said they’re open to making changes in the law, we expect the number of exemptions to increase.
And finally, the legislation is quite vague in places. This means the courts will be required to decide exactly who is and is not an independent worker. This will take time.
The bottom line is we won’t know the full impact of AB5 for some time – maybe even a couple of years.
But we do know it won’t kill independent work or the gig economy.
In case we haven't convinced you, we suggest you look at Massachusetts and New Jersy. They've had worker classification laws in place using the ABC test for years.
Despite that, the gig economy is doing just fine in those states.
We’ll have more on AB5 in the near future.
AB5 Exemptions
The fully exempted professions include:
A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California.
A lawyer, architect, engineer, private investigator, or accountant.
A securities broker-dealer or investment adviser or their agents and representatives
A direct sales salesperson (includes those involved in multi-level marketing and social selling)
A commercial fisherman
Sub-contractors in the construction industry
Subcontractors providing construction trucking services
Real estate agents
Additionally, many “professional services” providers are exempted if they meet certain requirements (see the actual bill if you’re interested in these details). These include:
Marketing services, broadly defined
Human resources services
Travel agent services
Graphic design services
Grant writers
Fine artists
Services provided by an enrolled agent
Payment processing agents
Services provided by a still photographer or photojournalist (does not include TV or motion picture industries or professions)
freelance writers, editors, or newspaper cartoonists
estheticians, licensed electrologists, licensed manicurists, licensed barbers, or licensed cosmetologists
Business service providers that contract to provide services to another such business are also exempt.
The legislation is quite vague in its definition of “business service provider,” so the courts will have to sort out exactly who is exempt. But it seems likely most independent workers who provide a service to a business will be exempt from AB5.
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