California Gov. Gavin Newsom has signed legislation into law that will codify a court ruling from last year that set new ground rules for what constitutes an independent contractor, and which expands on that ruling.

There’s been a lot written in the media about the legislation, AB 5, and unfortunately much of it misses the point. Some news reports have said it will spell the end of independent contractors in the state and that anyone a company hires to do a temporary job on contract must be treated as an employee, along with all of the obligations that go with that relationship.

Now that AB 5 is the law, state and federal labor laws will apply to independent contractors who have to be reclassified as employees. That means they would be afforded all of the associated worker protections, from overtime pay and minimum wages to the right to unionize. Employers would have to cover them under their workers’ comp policies, and extend benefits to them as they do to other employees.

The bill also gives the state and cities the right to file suit against companies over misclassification.

In its essence, AB 5 codifies and expands on a 2018 California Supreme Court decision that adopted a strict, three-part standard for determining whether workers should be treated as employees.

Known as the “ABC test,” the standard requires companies to prove that people working for them as independent contractors are:

  1. A) Free from the company’s control when they’re on the job;
  2. B) Doing work that falls outside the company’s normal business; and
  3. C) Operating an independent business or trade beyond the job for which they were hired.

The court explained that the first prong aligns with the common-law test for employment, evaluating the degree of control exercised by the company over the worker. The second prong examines whether the worker can reasonably be viewed as working in the hiring company’s business.

The third prong inquires whether the worker independently made the decision to go into business. The fact that the hiring company does not prohibit the worker’s engagement in such an independent business is not sufficient.

The bill will likely cause many industries to reclassify workers by allowing the state to enforce a stricter standard for independent contractors and freelancers.

Occupations affected

Below is a list of those occupations and the types of companies that would be affected:

  • Rideshare & delivery services – Like Uber, Lyft, DoorDash and Postmates
  • Truck drivers – Heavy duty trucks, Amazon delivery trucks, some tow truck companies
  • Janitors and housekeepers – Commercial cleaning services
  • Health aides – Nursing homes, assisted living facilities
  • Newspaper carriers – The bill’s author agreed to delay implementation by one year in a concession to newspaper publishers.
  • Unlicensed manicurists – Licensed manicurists will get a two-year exemption.
  • Land surveyors, landscape architects, geologists
  • Campaign workers
  • Language interpreters
  • Strippers
  • Rabbis

Occupations that would be specifically exempted by the bill include:

  • Doctors
  • Some licensed professionals (lawyers, architects, engineers)
  • Financial services
  • Insurance brokers, accountants, securities broker-dealers, investment advisors
  • Real estate agents
  • Direct sales (the salesperson’s compensation must be based on actual sales rather than wholesale purchases or referrals)
  • Commercial fishermen (exempt until 2023)
  • Builders and contractors (who work for construction firms that build major infrastructure projects and large buildings)
  • Professional services (marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists)
  • Freelance writers, photographers (provided the worker contributes no more than 35 submissions to an outlet in a year)
  • Hair stylists, barbers (provided that the person sets their own rates and schedule)
  • Estheticians, electrologists, manicurists (must be licensed)
  • Tutors (must teach their own curriculum, and does not apply to public school tutors)
  • AAA-affiliated tow truck drivers.

What employers should do

Legal experts recommend that employers:

  • Perform a worker classification audit, and especially review all contracts with personnel.
  • Determine which benefits and protections should be provided to any workers who are reclassified from independent contractor to employee (think health insurance and other benefits).
  • Notify any state agencies about corrections and changes to a worker’s status.

Discuss with legal counsel whether they should now also include them as employees for the purposes of payroll taxes, workers’ compensation insurance, federal income tax withholding, FICA payment and withholding.