In January 2020, new laws took effect that fundamentally changed the gig economy in California. These laws, passed by the California Assembly in Assembly Bill 5, created a new litmus test for employers to decide if workers are independent contractors or regular employees. These new standards are having impacts across a variety of industries as more employers are forced to classify workers as employees. For these employers, costs are skyrocketing as these workers are now guaranteed minimum wage, overtime, unemployment, workers’ compensation, etc. Many industries are fighting the new standards, yet they are forced to simultaneously adopt policies to comply.

The new gig-economy laws outline an “ABC” test for employers to use when classifying workers as employees or independent contractors. In order to qualify as an independent contractor under AB5, an employee must A. work independently, B. perform work that is different than the primary scope of the business, and C. offer their services to other companies or the general public. These new laws make explicit when an employer can classify workers as independent contractors and thus avoid paying minimum wage, avoid overtime costs, etc. For example, if a restaurant hires a plumber to make a plumbing repair, this worker presumably meets all 3 requirements of the ABC test and would continue to qualify as an independent contractor under the new laws.

While a restaurant hiring a plumber is a relatively clear-cut example, the bill is facing intense scrutiny and backlash from a variety of industries where it isn’t quite as obvious. For example, Uber is arguing that their drivers do meet the ABC test because they are a technology company and not a transportation company (meaning that drivers are outside the business’ primary scope). The state of California vehemently disagrees. Uber, Lyft, and other app based driving platforms are spending an estimated $100 million on a ballot measure to repeal the bill in 2020.

In addition, AB5 is having a widespread impact on freelance workers. For instance, the bill caps freelance journalists at 35 articles a year for any one publisher. If a publication wants 36 articles from a journalist, then they must take them on as an employee. Freelance workers across the state are reporting a decrease in the amount of work they are receiving. In December, Vox Media let go hundreds of freelance journalists in response to the bill.

Luckily for some industries, AB5 specifically exempts certain employers from complying with the new laws. Physicians, dentists, and accountants among others were exempt but many professionals are arguing that not enough industries were covered and that freelance workers in a variety of roles should be exempt from AB5.

One possible way to avoid the law is for workers to set themselves up as independent businesses. Forming an LLC or similar allows the worker to fall under the business to business exemption in AB5. Workers such as truck drivers who own their own rigs are taking advantage of this provision in order to continue the status-quo. This option is not without drawbacks though. For one, forming an LLC can be costly and workers would then be forced to maintain their status as an LLC incurring additional expense each year.

Only time will tell whether or not Assembly Bill 5 has the intended effects the State of California is hoping for. While the bill was passed in order to protect workers and combat income inequality, AB5 is costing jobs and tightening the labor market. If you think you or your business might be affected, we recommend discussing your specific situation with a qualified business attorney.