Assembly Bill 5 (AB5) has been effective for 2 years and continues to be a heated topic in employment law. The law is wide-reaching and applies to all industries and companies in California. As employers continue to navigate AB5 and the updates to it over the years, many organizations have been hit with misclassification lawsuits and liabilities that threaten their financial stability and integrity. 

To help you better understand the most recent changes to AB5 and how they may affect your business, we’ve put together an updated version of everything you need to know about AB5 in 2022.

What is Assembly Bill 5 (AB5)?

Assembly Bill 5 (AB5) is a California law signed into effect by Governor Gavin Newsom in September 2019. It codifies the “ABC” test, outlined in the Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) ruling – an evaluation that determines whether a worker is considered an employee or an independent contractor. To classify a worker as an independent contractor, it must demonstrate that all the following conditions of the test are satisfied:

  1. The person is free from the control and direction of the hiring entity in the performance of the work.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

On September 4th, 2020, a new bill called Assembly Bill 2257 (AB2257) went into effect. AB2257 brings forth several new statutory exemptions from the “ABC” test, which apply retroactively where applicable, as well as changes to existing exemptions.

Who is Exempt from AB5? 

AB5 has excluded certain types of work from its reach. Among the exceptions are doctors, dentists, psychologists, veterinarians, lawyers, architects, engineers, accountants, securities broker-dealers, graphic designers, tutors, investment advisers, real estate licensees and private investigators; certain marketing, sales, and human resources professionals; and licensed manicurists and barbers who can meet certain conditions, including setting their own rates.

AB5 also exempts B2B contractors that meet 12 specific requirements and referral agencies that meet 10 specific requirements. However, these business-to-business contractor exemptions require a carefully planned strategy to achieve compliance with all of the various requirements.

If a worker is exempt under AB5, they must still be evaluated under the flexible multi-factor test, the Borello Test, outlined by the California Supreme Court in the 1989 case of S. G. Borello & Sons, Inc. v. Department of Industrial Relations.

What AB5 Looks Like in 2022

There have been many petitions filed against AB5 over the past 2 years. Trade groups and “gig economy” companies lobbied heavily against AB5, claiming it would deprive many workers of flexibility and the opportunity to work multiple jobs. After countless lawsuits brought forth by drivers in the ride-share industry, an Alameda County Superior Court Judge ruled Proposition 22 to be unconstitutional in August 2021 and that the measure as a whole was unenforceable. The ruling has been appealed and Proposition 22 remains in effect until the litigation is concluded. 

Aside from gig workers, the California Trucking Association, the American Society for Journalists, and the Authors and the National Press Photographers Association have also filed petitions. All petitions, however, have been denied by the Supreme Court.

In January 2021, the U.S. Department of Labor (DOL) issued a ruling to clarify whether a worker may be classified as an independent contractor versus an employee under the Fair Labor Standards Act (FLSA). The DOL determined that two core factors should be applied to a worker. If both factors point to a definite classification, the business can classify the worker by that determination:

  1. The nature and degree of control over the work
  2. The individual’s opportunity for profit or loss

If, however, the first two core factors point to separate conclusions, the employers must then look at three other factors to decide:

  1. The amount of skill required for the work
  2. The degree of permanence of the working relationship between the individual and the potential employer
  3. Whether the work is part of an integrated unit of production

This shift in classification responsibility to the employer may reduce the number of misclassification violations occurring each year.

Key Takeaways

AB5 has significantly impacted business owners and employers in every part of California. To stay compliant, employers must take the time to re-examine their independent contractor relationships through the AB5 framework. Otherwise, employers will face an increased risk of lawsuits, fines, and penalties. We recommend companies engage legal counsel to assist with an independent contractor analysis and, if appropriate, craft independent contractor agreements that clearly demonstrate that their workers meet the applicable standards to avoid potential litigation.

If you need any assistance with an independent contractor analysis or crafting a legally compliant independent contractor agreement, contact Hackler Flynn & Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.

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