California's Gig-Work Protection Law

By: First Union


California's Gig-Work Protection Law

What is California's gig-work protection law? Who is protected under California's gig-work protection law? Why should the California gig-work protection law exist? What arguments are against the existence of California's gig-work protection law? Are independent contractors considered employees under California's AB5 protection law?

As of January 1, 2020, gig-workers changed when California passed the Assembly Bill 5 (AB5/) state statute to protect those who work gigs for larger organizations. Before January 1, 2020, the millions of workers classified as independent contractors did not qualify for protection under the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act. Independent contracts were also not guaranteed the right to minimum wage, overtime page, or unemployment insurance.

What is AB5?

California's 2019 Assembly Bill 5 "Gig Work Protection Law" (AB5/) entitles workers classified as employees to greater labor protections, such as minimum wage laws, unemployment, workers compensation, and sick leave. This state statute was codified by the Supreme Court of California, but is still creating a rift in California's labor force and was passed based on concerns over employee misclassification within the gig economy.

Misclassification is determined by a three-phased assessment:

  1. The individual is free from direction and control under their contract for the performance of service
  2. The service is performed outside the usual course of business of the employer
  3. The individual is customarily engaged in an independently established profession, business, or trade of the same nature.

If an independent contractor qualifies as an employee they will need to complete all necessary W 4 forms and the employer will withhold taxes and contribute payroll taxes to the proper state and federal authorities. Employees are then able to claim worker's compensation and unemployment benefits. Additionally, employees must be paid at least minimum wage and fall under California's requirement for overtime pay.

Businesses Exempt from AB5

AB5 allows your California business to apply for an exemption. Typically, exemptions apply to doctors, dentists, psychologists, stockbrokers, lawyers, insurance agents, engineers, accountants, and real estate agents. These businesses are seen as typically offering direct-to-consumer work at a fixed price.

If you are applying for exemption, you must be able to prove the following:

  • Whether or not your independent contracts have the wherewithal to set and/or negotiate their prices
  • Whether the independent contractor has direct communication and contact with consumers
  • Whether the independent contractor earns at least twice the minimum wage

Remember, the IRS and California assume that a worker is an employee unless proven otherwise.

Businesses Denied AB5 Exemption

AB5 has caused quite a few issues in California for Uber, Lyft, Postmates, and DoorDash. All three organizations applied for AB5 exemption and were denied. They all asked a federal judge in Los Angeles to block enforcement of AB5 as they said it would add 20% to 40% in labor costs. These labor costs require the businesses to restructure their business models, which could reduce the number of on-demand workers each business can hire.

The reason these businesses were denied? California argued that AB5 will repair the erosion of the middle class, and equalize income to make up for what the on-demand companies have contributed to inequality-wise. Though technology companies believe that AB5 will slowdown technology development and growth, California finds it a necessity to enter into the next decade.

AB5 Independent Contractor Worries and Criticisms

AB5 protects more than Uber drivers, it protects any freelancer - which makes up a lot more of the population than you would think. However, freelance writers, musicians, photographers, film workers, and TV workers could face the issue of less-frequent work. If a company does not want to deal with providing benefits to independent contractors, they may find that it is more cost-effective to take them on a full-time basis.

Many independent contractors worry about businesses severing ties with them as a result of this state-wide statute. They also can see their workload decreasing based on these laws. Even independent contractors are already unionized, they still worry that they could see a decline in available work.

However, other unconventional independent contractors have come out of the woodwork in hopes to benefit from AB5. Workers are looking to create a safe and fair environment to work in, where both the contractor and contractee benefit.

AB5 and the Path to Labor Union Growth

AB5 aims to crack down on the tax loopholes - which is estimated at a $7 billion loss of payroll tax revenue - in hopes of broadening benefits for tech workers and pave the way for more unions. Ride-share companies are those who are making the most noise on the topic because it changes the game completely.

With the new protections in place, unions will form for additional freelance industries to uphold and continue protecting independent contractors.

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