California’s ‘Assembly Bill 5,’ AB-5, was signed into law last year and came into effect on January 1, 2020. The ‘gig-worker law’ reclassifies many gig workers as employees with the associated entitlements to minimum wage, paid sick leave and overtime pay.

How the law got its start

The AB-5 takes its cue for defining employees vs. independent contractors from a 2018 California Supreme Court ruling that Under the more stringent system, a worker is considered an employee unless they meet these three criteria:

  1. The worker’s duties are not under the control of the business they are working for
  2. The worker is doing work that is not typically done by workers in that industry
  3. The worker must have additional clients, whom they do similar work for

Intended protections vs. actual use

In addition to the proposed benefits to gig economy workers, there are further ramifications of the law, which can impact employers and workers in a multitude of ways:

  • Unfair competition: There are benefits under the new law to employers who had difficulty competing with those companies that misclassified their workers.
  • State revenue: The law would increase the payroll taxes, social security, disability insurance avoided by those companies that misclassified their workers.
  • Self-employed workers: Though AB5 addressed some of the needs for workers at ‘gig economy’ companies, like Uber and Grubhub, the law also expanded the number of self-employed workers in California who will be reclassified with regards to state tax purposes and labor regulations.
  • Business-to-business: The law complicates a wide array of business-to-business transactions related to contracted service providers.

The future business impacts

If a business is deemed in violation of the new law, the legal repercussions could include both fines and issuance of back pay and benefits. During this time of legal transition, there will be many unforeseen outcomes. It is essential that you find a lawyer knowledgeable in commercial business litigation, to explore what areas of your business are susceptible to litigation.