California AB5 Means Big Changes for State's Workers' Compensation

The state of California has made significant changes to how businesses classify their employees. Many employees are excited. Some business owners are. . .a bit hesitant.

Here’s why.

California Assembly Bill 5 (AB5) was signed into law on September 18, 2019. It limits the ability of businesses to classify workers as independent contractors rather than as employees. California AB5 gives workers more labor protections including workers’ compensation benefits, minimum wage laws, and sick leave.

According to California Governor Gavin Newsome, in a recent legislation signing message: “Assembly Bill 5 is landmark legislation for workers and our economy. It will help reduce worker misclassification—workers being wrongly classified as independent contractors, rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.”

Why AB5?

The bill arose out of a Supreme Court of California case that put the responsibility on employers to demonstrate independent contractors are properly classified (and that they shouldn’t instead be considered employees). The bill was supported by groups like labor unions, rideshare organizations, and democrats—and was opposed by groups like the state’s chamber of commerce, rideshare companies, and republicans.

Know your ABCs

California AB5 will implement a means for classification known as the ABC test. As summarized in the San Diego Union-Tribune, the ABC test prohibits an employer from classifying a worker as an independent contractor unless the employer can establish that:

1. The hiring entity does not control or direct the worker in performing the work in fact or under the terms of a contract.
2. The work performed is outside the “usual course” of the hiring entity’s business.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Exceptions to California AB5 include business-to-business contracts, accountants, engineers, physicians, lawyers; certain human resources and marketing professionals; and certain barbers and manicurists.

Mixed opinions about California AB5

So, who’s excited about California AB5?

Rideshare drivers, couriers, taxi drivers, translators, franchise owners, and hundreds of thousands of independent contractors who are active in today’s gig economy are avid supporters of AB5. Many of these individuals feel they have been exploited by being labeled as contractors (when instead, they believe they should be eligible for employee benefits).

Who is hesitant?

Mostly, business owners are dissatisfied with the passage of California AB5. Between minimum wage, overtime, unemployment insurance, workers’ compensation, and additional benefits, business owners may see up to a 30 percent increase in labor costs. One fear is how this will impact consumers who may bear the brunt of the increasing costs and lower quality services. Some contractors, who value their independence and don’t care to be employed, are also opposed to the new developments.

How will AB5 affect your California small business?

The effects of California AB5—over the short and long term—remain to be seen. AB5 will take effect January 1, 2020. If you’re a California small business owner, the changes could have a profound impact on your business. Now is the time to research workers’ compensation and other benefits you may be providing your team members in the near future. As the cost of running a business increases, it will become that much more important to secure the best rates for your small business insurance.

Thanks for reading! Please note that this content is intended for educational purposes only. As laws change regularly, you should refer to your state legislation and/or an advisor for specific legal counsel. If you’re a small business owner, learn more about workers’ compensation or check your current rate in 3 minutes.