What Is California’s AB5 and What Was It Designed to Do?
In 2019, California’s AB5 Bill was signed into law. This landmark bill addressed the employment status of many workers hired under the independent contractor category. If you were hired as a ride share driver, work consultant, etc., the AB5 Bill now required that your application (or job description) had to pass the “ABC test” to determine if you acted as an employee or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.
The ABC test aimed to prevent businesses from misclassifying employees as independent contractors. These businesses must show proof to avoid paying their employee benefits, minimum wage, overtime, payroll taxes, etc.
How Do You Determine You’re a Company Employee In California?
Under the ABC test, it is presumed that you are an employee unless the company hires you, and you can prove and meet all three of the following conditions:
- As a worker, you are free from the control and direction of the company that hired you in connection with your work performance.
- You perform work outside the usual course of the hiring entity’s (or companies’) business.
- As the worker, you are customarily engaged in an independently established trade, occupation, or business of the exact nature as the work performed.
This new law aims to better protect crews and employees and ensure fewer people are taken advantage of and lose out on the benefits they deserve due to loopholes in the old rules. The law maintains that all contract employees are entitled to these greater labor protections, such as minimum wage, paid sick leave, unemployment insurance, etc., which closes exploitative loopholes.
If you believe your outside, or “gig” job, should provide you with various benefits you now don’t receive, you should consult an experienced California labor lawyer and allow their professional knowledge to help you determine if you’re not receiving what you rightfully deserve.
What Types of Workers Are Usually Affected by AB5?
Since it was signed into law, California’s AB5 Bill has impacted various industries and occupations historically dependent on freelance or contract work. Some of the most common work groups include:
- Rideshare, delivery drivers, etc. – Companies such as Uber, Lyft, and DoorDash have consistently been central to the ongoing AB5 debate.
- Freelance writers, editors, and photographers – These outside content creators must be mindful and aware of how much work they do for a single client, as this may affect their workplace status.
- Musicians and other performing artists – Many multiple-night gig workers can be classified as employees if their jobs don’t meet the ABC Test’s criteria.
- Many Small businesses or startups – Companies relying on flexible contractor relationships for specialized projects may face new compliance challenges.
What Are The Exemptions For California’s AB5 Bill?
However, this is not a “cut and dried” Bill, and certainly not every gig worker is automatically reclassified as an employee under AB5.
For example, the law carved out exemptions for specific professions, such as:
- Numerous licensed professionals – including doctors, lawyers, accountants, architects, etc.
- Real estate agents and insurance brokers.
- Specific creative professionals – Such as writers, photographers, graphic designers, and more, under specific and targeted limits (for example, 35 submissions per client per year for writers).
- Business-to-business contractors – Only if strict conditions are met.
These “carve-outs” of the AB5 law offer relief for some workers, but many independent contractors remain in a gray area, uncertain about how the law applies to them. If you’re in doubt about your classification and the benefits you may be missing out on, consulting with a well-versed and knowledgeable labor lawyer can ensure that the benefits you deserve are provided to you.
What Are Some Legal and Practical Implications for Businesses and Their Workers Under AB5?
California’s AB5 Bill can have significant and dire legal and financial consequences for businesses and workers. If a business misclassifies workers, it can result in heavy fines, back pay claims, and penalties from California’s Labor Commissioner.
So, if you run a small or large business, it’s essential that you:
- Reassess all your employee contracts and working relationships.
- Where required, provide the proper benefits, such as unemployment insurance and workers’ comp.
- Pay eligible employees’ minimum wage, overtime, and payroll taxes.
- You may face dire and significant penalties and lawsuits if you fail to comply.
As an independent contractor, this Bill could mean:
- You may lose the freedom and flexibility that initially attracted you to gig work.
- If businesses cut freelance contracts, you might have to accept fewer clients to avoid the risks of non-compliance.
- You may need to meet additional requirements (such as business licenses and insurance) to strengthen your independent gig worker status.
- A loss of income streams if your clients hire employees instead of using your services.
California Bill AB5 is a “double-edged sword,” as many gig workers have spoken out against it, even though it’s designed to help them. They argue that it limits their livelihood and freedom to choose when and how they work.
The controversy is still raging in California, and AB5 is constantly under legal scrutiny and possible change. Therefore, if you’re a gig worker or business owner confused about how this Bill may affect your business or life, a skilled labor lawyer’s professional advice and knowledgeable guidance are mandatory.
If I’m Classified as an Independent (gig) Worker, What Are Some Tax Implications I May Face?
If you’re classified as an independent contractor (or gig worker) for federal and California tax purposes, instead of receiving a W-2 from your employer, you will receive a 1099-K, 1099-MISC, or 1099-NEC. This form will report payments made to you to the IRS for tax purposes.
Your employer will not take anything out of your payments for pre-tax payments, etc., and therefore, you alone will be responsible for calculating what you must pay in yearly taxes.
What Potential Deductions Does The AB5 Bill Offer?
Unlike a company employee, all independent contractors are considered self-employed, and the good news is that you can take numerous applicable deductions for ordinary and necessary business expenses, thus reducing your taxable income.
Just a few of these types of deductions are:
- Travel expenses.
- Vehicle expenses, possibly maintenance, and more.
- Bad debts incurred and depreciation.
- Office rent (even if it’s a “home” office).
- Pension plans, and state and local taxes.
- Property, sales, excise, and fuel taxes
- And possibly much more.
Since you’re not an employee, there is no withholding requirement on the hiring entity for Social Security or Medicare. However, as a gig worker, you must pay the federal Self-Employment Tax, which accounts for Social Security and Medicare taxes.
In many cases, being able to take these numerous and varied deductions may be a valued benefit. If you’re confused on this subject, you have good reason to be, as it’s complex. However, with the help of a well-versed labor and employment lawyer, you can obtain all the answers you need and make the most of this tax benefit in the best way possible.
As a Gig Worker (or Business), I Need Clarification on My AB5 Status; How Should I Proceed?
AB5 has indeed done a great deal to reshape California’s labor landscape. However, its ripple effects, which are fostered by its inherent complexity, reach beyond state lines as other states consider similar laws. In California, the Bill’s legal challenges, amendments, and propositions continue to reshape how it’s enforced, which causes a great deal of confusion for both gig workers and businesses.
If you rely on gig work or your business relies on gig workers, you must remain proactive in understanding and implementing the rules of AB5; mistakes are costly and time-consuming to fix.
Speak With Our Business and Employment Law Attorneys To Learn More
At the law office of Geonetta and Frucht, LLP, our Northern California attorneys have over 50 years of experience helping California businesses and independent contractors understand, adapt to, and stay compliant through understanding California’s AB5 bill (and other mandatory related labor laws).
Call us today in Oakland at (510) 250-2743 or San Francisco at (415) 237-1212 for a free consultation on your unique case. Let’s ensure your business or career stays on the right side of the law and thrives.
