Is California ready for AB5?
When California’s Assembly Bill 5 passed the state senate’s Labor, Public Employment and Retirement Committee by a 4-1 vote in June, it marked the penultimate step in what is shaping up to be a dramatic change within the state’s economic landscape—one way or the other. If adopted in its current form, AB5 would transform an estimated 2 million workers from independent contractors to employees.
For California-based employers most affected by AB5, HR leaders are likely to face compliance nightmares, according to attorneys who represent those businesses. For instance, employers whose workforces are currently largely considered independent contractors—such as Uber, Lyft and GrubHub, for instance—will have to extend the same types of benefits and pay levels mandated by state law for employees to these former contractors.
As it moves towards an expected vote by the full state assembly next month, AB5 is loaded with exemptions for specific types of workers—but that doesn’t mean much in the eyes of some legal experts.
AB5 is based on the California Supreme Court’s Dynamex decision, which means a so-called “ABC” test will be used to determine if a person is an independent contractor or not. To keep someone as such, an employer must prove that the person is:
- free from company control;
- performs work not central to the company’s business; and
- has an independent business in their industry.
If they employer meets all three of those parameters, the worker can be classified as an independent contractor. That’s a very tough test, which, experts says, most “gig”-economy employers will not pass.
According to Michael Lotito, a shareholder at Littler and co-chair of the firm’s Workplace Policy Institute, imposing the “ABC” test on California businesses and workers will dramatically alter the employment-law landscape in the state, and beyond.
“The state’s workplace laws and regulations, along with local city laws and rules, will then apply to these newly classified workers and give rise to potential back-pay claims for misclassification. Employers will face very difficult choices, many of which are not appealing,” he says. “For HR, AB5 is the most significant employment law impact-wise in America today. It’s not going to be only a California problem.”
To help employers potentially affected, Littler’s WPI established an AB5 Task Force of employment-law attorneys. The coalition offered an in-depth analysis of the law, evaluated its potential consequences, developed practical suggestions for clients on potential compliance options and strategies, and “brainstormed ideas and solutions to chart a better way forward,” Lotito says.
The ABC test, if adopted, would be added to a growing list of employment-law concerns California employers are confronting, Lotito explains. He adds that California has the fifth largest economy in the world, and it has continued to grow despite what some describe as an “over-regulated” environment for businesses.
“The main overriding concern is that this is an enormous social experiment, taking 10% of the state’s workforce from independent contractor to employee status,” he says. “We believe the consequences are guaranteed to run amok.”
Lotito believes AB5 proponents have no real idea what the actual impact on employers will be, noting that, if an employer has five independent contractors, converting them to employee status is not very dramatic. But, if one has 5,000 of those “evolving workers” functioning within an “ever-evolving workforce,” it will be a “big deal” cost-wise.
Nancy Yaffe, a partner in Fox Rothschild’s Los Angeles office, says there is no doubt that AB5 will make it harder to do business in California.
“Compliance here is already a challenge compared to other states,” she says, noting that her law firm offers a booklet on how California is “special” in that regard. Yaffe explains that, under the proposed version of AB5, a business that has a contractor-support model essentially has to change that approach in California—not easy to do in every situation.
“Paying an employee who works in one location and can easily log her work time and breaks is one thing,” she says. “But paying a remote worker, who stops and starts throughout the day, and travels or works remotely (doing personal things in between), is a whole different ball game.”
She adds that the traditional employee system is not set up to properly pay such remote workers, let alone give them meal and rest breaks, and have sufficient documentation of those hours worked and breaks taken.
“Honestly, it is a recipe for litigation,” she says.
“Our current laws are sufficient to take care of these issues,” Lotito adds. “The cure is worse than the disease.”
While supporters of the law say that a similar measure has worked in Massachusetts since 2004, Lotito says the comparison is flawed. He notes that the total workforce in Massachusetts is 3.6 million, while California claims a workforce of 19.5 million, including 2 million whose status will change under AB5.
“It’s not even apples to oranges,” he says. “It’s more like comparing a fruit salad to a vegetable salad.”
Yaffe says that, to make matters even more complicated, many so-called “gig” workers are paid by the job, not the hour. Paying that way, on a piecework system, is extraordinary complicated in California. Yaffe says an employer who takes that approach will have a hard time getting it right, as California law requires payment for break times pursuant to a complicated mathematical formula that changes per week.
As far as how it affects California-based employers who have employees in other states, the impact is undeniable, according to Yaffe. There are already patchwork laws that differ per state or jurisdiction (such as laws regulating minimum wage, paid sick leave, job postings and harassment training).
“Now, there is another one,” she says. “But—unlike a benefit, a pamphlet or a training session—this is a core way of setting up a business and generating profits. So a national company that wants to set up business in California may need to set up an entirely different business model to do so.”
Many industries have been lobbying the California state legislature to be exempted from AB5, and to have a more lenient standard for contractors in the workplace. As of today, the bill includes exceptions for jobs such as licensed insurance agents, certain licensed healthcare professionals and even workers providing hairstyling or barbering services who rent booths, among a host of others.
“This just makes compliance all the more confusing,” Yaffe says.
Yaffe says that, other than moving out of California—which she hopes businesses will not do—compliance will involve very strict timekeeping and pay-by-the-hour requirements, and stringent rules about timing and duration of meal and rest breaks, Yaffe notes.
“All policies need to be reviewed and updated for California, even if they are fine everywhere else,” she says. “Fundamentally, AB5 becoming law means that the cost of doing business in California has just gone way up.”