At a Glance
- The California Labor and Workforce Development Agency has released additional employer resources, worker resources, and FAQ’s for CA AB 5.
- AB 5 requires most employers to follow the ABC test when classifying their independent contractors.
- AB 5 is effective January 1, 2020.
In September 2019 AB 5 was passed and signed by the Governor and goes into effect January 1, 2020. The law significantly changed how worker classification is determined and incorporates the “ABC Test” as part of California employment code.
The ABC Test is a three-pronged standard to determine whether a worker is an independent contractor instead of an employee. Under this standard, a worker is considered an employee unless each of the three requirements below can be met in order to classify the worker as an independent contractor.
A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
B. The worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
To aide employers in compliance with AB 5, the CA Labor and Workforce Development Agency has released additional resources, which can be found on the agency’s Employment Status Portal.
The agency has provided employer and worker resources, as well as, an FAQ that answers key questions employers and workers may have about worker classification in California.
Within the FAQ, question 7, the agency has expanded the number of occupations that are exempt from the ABC test and will instead continue to follow the Borello test. The agency has also provided employer resources with additional information about the exceptions to the ABC test, misclassification penalties, and tax obligations.
The updated information does not clarify if AB 5 will apply retroactively for contractor relationships established before April 30, 2018, which is when it was stated that the ABC test applies in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County.
Currently the California Supreme Court is reviewing if the ABC test will apply retroactively. We will provide updates as additional information is available.
Employers who have workers in California should take steps now to audit their workforce to ensure workers are correctly classified. Employers should review the additional information provided by the agency regarding AB 5. Additionally, please see Paylocity article “CA AB 5 FAQs.”
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This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.