On September 11, 2019, the California lawmakers passed AB 5, Worker Status: Employees and Independent Contractors. Governor Newsom has recently announced his support of the bill and we anticipate that he will sign the bill soon. The bill makes significant changes on how worker classification is determined and once signed, AB 5 will incorporate 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.
California AB 5 stems from a 2018 California Supreme Court decision, known as Dynamex Operations West, Inc. v. Superior Court, which redefined the definition of employee and put in place a new standard for classifying workers as independent contractors. Under the Dynamex decision, organizations must apply the ABC Test to determine if a worker can be classified as an independent contractor.
California AB 5 makes several amendments to the California Labor and Unemployment Insurance Codes. Once effective, many workers who were previously classified as independent contractors will be eligible for employee and unemployment benefits, such as:
Several professions are exempted from AB 5, including doctors, dentists, insurance agents, accountants, engineers, travel agents, and so on. Generally, these exemptions apply to professions where the worker sets their own prices directly with their customers.
Employers who have workers in California should take steps now to audit their workforce to ensure workers are correctly classified. For additional information about AB 5, please see 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.