California AB5 creates a new set of rules for California companies that work with contractors. The law changes who qualifies as a contractor and who does not. Thus, every company in California must understand the basics so they can avoid legal liability.
This article offers the world’s best overview of the law.
Photo by Austin Distel on Unsplash
What Does California AB5 Do?
California AB5 came into force on January 1, 2020.
The law changes the definition of an independent contractor in California. Ultimately, the law imposes restrictions upon who can be considered an independent contractor in California.
Before this law, the law defined independent contractors based upon an “economic realities test.” Simply put, if someone behaved as an independent contractor, they could be considered an independent contractor.
This law changes that. It creates a rule about who qualifies as an independent contractor. Under California AB5, someone can only be considered a contractor if:
- They control how they work.
- The work done falls outside the hiring company’s usual course of business.
- They customarily engage in an independent trade.
The second point seems to give business owners the most trouble. Many businesses hire independent contractors to provide services that their customers hire them to do. Under this law, that may no longer be possible.
While exceptions exist, the law tightens the definition of an independent contractor.
Why Everyone Cares About California AB5
Ultimately, California AB5 fundamentally changes California’s employment law.
That means that business owners and freelancers care about this law. A business that fails to comply with this law faces the real threat of worker misclassification lawsuits. These lawsuits cost a ton of money and distract from the core of running a business.
Specifically, many creative businesses that rely upon independent contractors may have to change their business models. Even if the independent contractor relationship works for all involved, the law forces some California businesses to make contractors into employees.
How Should Businesses Deal with California AB5?
- Educate yourself on the law. California AB5 creates new responsibilities for business owners. The best way to meet these responsibilities is to educate oneself and take a proactive approach. This article offers a starting point, but smart business owners seek in-depth information.
- Have a good independent contractor agreement. Business owners must clarify every relationship they have with an independent contractor. If your business works with independent contractors, take the time to consider drafting an independent contractor agreement.
- Understand the exceptions. California AB5 provides exceptions to the general rule. Business owners should determine which exemptions apply to their particular situation.
- Seek legal counsel. Getting legal help need not scare you – you can work with a lawyer relatively cheaply. Since every situation differs, you need legal advice to know how a particular law applies to your situation. Remember, also, that information you find online or via a DIY website like LegalZoom does not suffice.
The Final Word on California AB5
This law forces California businesses to look closely at how they build their teams. In the past, companies had flexibility in how they managed their working relationships. Now, much of that flexibility has been taken away.
The best thing for any business owner to do: make a plan. As with any legal matter, ignoring the law does not make it go away. By working with an attorney, you can understand how this law affects your business. Once you have this knowledge, you become empowered to make decisions that build long-term success.
