What Employers Need to Know About Assembly Bill 5

On January 1, 2020, Assembly Bill 5 (AB 5) will go into effect and may impact whether your workers are treated as employees or as independent contractors under California law.

In 2018, the California Supreme Court adopted "the ABC test" in Dynamex v. Superior Court. Under the ABC test, a worker is considered an employee, and not an independent contractor, unless the hiring entity can demonstrate that it meets all three of the following requirements.

1. The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
2. The individual performs work that is outside the usual course of the hiring entity's business.
3. The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 was signed into law to codify - or write into statue - the ABC test from the Dynamex v. Superior Court decision. Under AB 5, the "ABC test" must be used to determine the appropriate classification of workers in most occupations for purposes of the Labor Code, the Unemployment Insurance Code, and Industrial Welfare Commission (IWC) wage orders.

The rules are complicated and exemptions for certain occupations do apply. Resources are available to help you understand the ABC test and your obligations:

Please visit Labor.ca.gov/employmentstatus, which contains information from various state entities.

The penalties are substantial for willful misclassification of workers as contractors. If you have additional questions about the classification of workers, an attorney experienced in labor laws in California should be consulted to avoid misclassification.