In January 2020, California’s controversial Assembly Bill 5 (AB5) went into effect. This new law dramatically changes the way California businesses classify independent contractors. Intended to target ride-share companies Lyft and Uber, legislators hope the bill forces employers to provide these “gig workers” higher wages, increased job security and health benefits.
Lawmakers have refined AB5 since January, responding to lawsuits from companies who rely on independent contractors to remain profitable. Understanding the new classifications can help business owners remain compliant with the law and treat their employees fairly.
New classification rules under AB5
The history of AB5 traces back to a 2018 ruling against the company Dynamex. Their delivery drivers alleged that Dynamex misclassified them as independent contractors. The California Supreme Court rejected previous rules classifying independent contractors and adopted a new standard that presumes all workers are employees, not contractors. Under the new “ABC test,” hiring entities can only classify a worker as an independent contractor if they establish:
- that the worker operates without direction in the performance of the work;
- that the worker performs work outside of the hiring entity’s usual course of business; and
- that the worker is engaged in an independently established business of the same nature of the work.
Conflict surrounds reclassification
Ever since the 2018 ruling, California businesses and local legislators have been at odds, taking aggressive legal action. Uber and Lyft, along with other companies affected by AB5, have formed a coalition that is funding a multi-million dollar ballot measure that combats the new classification. Truck drivers have railed against the bill, securing the support of a federal judge who blocked AB5 from changing their classification. Driver advocacy group Rideshare Drivers United weighed in as well, pressuring state legislators to enforce AB5 and award its members over $630 million in back pay. The State of California is currently suing both Uber and Lyft for refusing to adhere to the new classifications.
A law defined in the courtroom
As the law matures throughout the year, subsequent lawsuits will test the law with industry-specific context and interpretations. California businesses that employ independent contractors can find more information by consulting with a local attorney familiar with California employment law.