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Navigating AB-5: Implications and Solutions for Small Business Owners in California’s Gig Economy

Gig economy, freelance, hybrid workplace concept. The combination of employment trend; growing to external hiring. Independent workers engage in short term work arrangements. Working with computer.

The gig economy has transformed the way we work, creating a workforce of independent contractors who work for businesses on a short-term basis. However, California’s Assembly Bill 5 (AB-5) law, which took effect in January 2020, aims to make it more difficult for businesses to classify workers as independent contractors, instead of employees. The law has significant implications for small business owners in California, who rely heavily on independent contractors to help them run their businesses. 

In this blog, we will explore the impact of AB-5 on small business owners in California and the solutions available to navigate its complexities. We will also provide updates on the current status of AB5 and its potential implications for businesses in California.

What is Assembly Bill 5 (AB-5)?

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

What Businesses Does AB-5 Affect?

AB-5 affects all small businesses and small business owners. Most prominently, AB-5 impacts SBOs who hire 1099 independent contractors and their operations in California.

The ABC Test and Its Implications

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

How To Meet The ABC Test Criteria 

When classifying your 1099 independent contractors according to the ABC Test, gather the following information to make sure they are classified correctly.

The First Criteria

  • Gather information on project deliverables and how they are delivered.
  • Have your contractor submit an invoice.
  • Keep correspondence about project timelines recorded in a clear and accurate manner.
  • Ensure you’re not placing requirements on your 1099 contractors regarding how they perform their work. For instance, do not tell the workers what to do or specify reporting requirements. 
  • Document and file scope of work (SOW) from your contractor.

The Second Criteria

  • Compose a definition of your contractors’ line of work.
  • Compose your definition of your business’s line of work (i.e. what products or services does your company provide?)

The Third Criteria

  • Verify if your 1099 has insurance.
  • Ask if they have a legal entity.
  • Check if they have associations, unions, or other affiliations.
  • Review their professional certifications.
  • Gather their business card, website, and a list of other clients the contractor has worked for.

The distinction between who qualifies as an independent contractor versus an employee is significant because contractors aren’t entitled to the protections that many laws provide to employees. For example, employees are entitled to minimum wage, overtime pay, workers’ compensation, and other benefits. With the implementation of AB-5, many workers who were previously classified as independent contractors but should have been classified as employees became entitled to these benefits.

The Impact of AB-5 Law on Small Business Owners in the Gig Economy

In recent years, the gig economy has grown significantly, characterized by short-term contracts and freelance work. Freelancers are independent contractors hired by businesses to help with specialized or short-term work. However, the gig economy has been impacted by California’s AB-5 law, making it more difficult for businesses to classify workers as independent contractors. 

This has significant implications for small business owners in California, who rely heavily on independent contractors to help them run their businesses.

The Dynamex ABC Test and AB-5 Law

The Dynamex ABC Test, set forth by the California Supreme Court, has played a significant role in AB-5. The test determines whether a worker is truly an independent contractor or an employee. While AB-5 has made it harder for businesses to classify workers as independent contractors, it ensures that those who should be considered employees are entitled to certain protections and benefits. However, the lack of clarity and exemptions in the law have led to public backlash and legal battles for organizations like Postmates, Uber, and the International Franchise Association.

Small Business Owners’ Struggle with AB-5

Small business owners are among those most affected by AB-5 as they rely heavily on independent contractors to help them run their businesses. Many small businesses cannot afford to hire employees and provide them with benefits such as healthcare, paid time off, and workers’ compensation insurance. With AB-5 in place, small businesses may have to reclassify their independent contractors as employees, resulting in significantly increased labor costs. This can result in businesses having to cut back on their workforce or even close their doors altogether.

Navigating AB-5: Solutions for Small Business Owners

Small business owners can turn to resources like Got1099 to navigate the complexities of AB-5 and avoid legal battles and fines. Other solutions include restructuring the business to reduce reliance on independent contractors or lobbying for changes to the law. Some small business owners may also opt to relocate their businesses to states where the law is more favorable to independent contractors. Understanding the impact of AB-5 is crucial for businesses to navigate its complexities and continue to thrive.

The Current Status of AB-5: Updates and Implications for Businesses

Recent developments surrounding Assembly Bill 5 (AB5) have garnered attention and sparked questions about its current status. In June 2022, the United States Supreme Court declined to review two cases challenging the constitutionality of AB5. While the Court’s decision does not necessarily prevent future lawsuits, it is expected to discourage further litigation.

Numerous organizations, such as Postmates, Uber, and the International Franchise Association, have already experienced setbacks in California district courts regarding their classification of workers as independent contractors. As a result, it appears that AB5 is here to stay, at least for the time being.

Despite this, the public’s negative reception of AB5 has not gone unnoticed. The law’s initial exemptions drew swift criticism for their lack of clarity. As such, it remains an issue that will continue to be watched closely.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5.

To learn more, read on about how to hire an independent contractor.