California Assembly Bill (AB) 5 went into effect on Jan. 1, causing many independent workers and the companies with which they partner to scramble.
Primary concern centers on what the new law means, who is impacted and whether independent workers each need to form a limited liability company (LLC).
Passed last year, AB5 codified the strict “ABC” test for classifying independent contractors as specified in the Dynamex case.
Now in place, AB5 is still confusing for some.
“The focus of this legislation was likely centered on today’s gig economy, but the result seems to have spread the net wider,” said Lizbeth V. West, an experienced employment attorney.
According to West, chair of the Labor and Employment Group at Weintraub Tobin, properly classifying independent contractor status has long been necessary.
“Even before AB5, in California, there was never the ability to simply elect to be an independent contractor versus an employee,” West said.
Previously, the Borello multi-factor test, which used a number of factors to determine the concept of the “right to control” over the work, was used to ascertain a worker’s status. AB5 replaced Borello with the three-pronged ABC test. Determining factors under the ABC Test consider: is the worker free from the hiring entity’s control and direction; is the work outside the hiring company’s usual course of business; and is the worker customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
According to West, the ABC test provides an all-or-nothing viewpoint that applies to considerations from wages to workers’ compensation to taxes. However, the matter is still confusing because AB5 includes many exemptions, none of which guarantee independent contractor status.
“The exemptions in AB5 simply relate to the application of the ABC test,” noted West, adding that those who fall under an exemption still need to evaluate independent contractor status under the Borello test.
West noted that the push for the stronger ABC test centered on the concept of “gig work.” As a result, various industries have sued over AB5, and efforts by companies, lobbyists and others are underway to seek clarity to the law and its application.
Adding to the confusion has been discussion of independent workers filing to officially create a Limited Liability Company (LLC). While some news reports have pointed to an increase in LLC applications, statistics provided directly by California’s Office of Secretary of State paint a somewhat different picture.
In 2017, LLC filings were up an average of 10.91% over 2016 while 2018 filings increased 12.73% over 2017. The yearly average for LLC filings in California for 2019 only increased 5.71%. Two months last year - both after the passage of AB5 - saw filings decrease in comparison for the same month in the previous year.
To navigate the murky waters, West recommends that workers and/or hiring entities unsure how AB5 applies to their working relationship should consider working with an employment lawyer. She also noted that trade associations within various industries can be another source of information.
“I expect to continue to see changes on this,” West added. “Even employment lawyers need more clarification.”