What Is California Assembly Bill 5 (AB5)?

California Assembly Bill 5 (AB5), popularly known as the “gig worker bill,” is a piece of legislation that went into effect on Jan. 1, 2020, and required companies that hire independent contractors to reclassify them as employees. The passage of Proposition 22 later that year overrode it as far as app-based drivers were concerned.

Key Takeaways

  • California Assembly Bill 5 (AB5) extends employee classification status to some gig workers.
  • Under AB5, companies must use a three-pronged test to prove workers are independent contractors, not employees.
  • AB5 was designed to regulate companies that hire gig workers in large numbers, such as Uber, Lyft, and DoorDash.
  • On Sept. 4, 2020, the California legislature passed Assembly Bill 2257, which exempts a long list of job categories from AB5 strictures.
  • On Nov. 3, 2020, California voters approved Proposition 22, an initiative backed by Uber, Lyft, and DoorDash that legally designates drivers for app-based ride-hailing and delivery services as independent contractors—overriding AB5.

Understanding California Assembly Bill 5 (AB5)

California Assembly Bill 5 (AB5) is a piece of legislation signed into law by Governor Gavin Newsom in September 2019. It went into effect on Jan. 1, 2020, and required companies that hire independent contractors to reclassify them as employees, with a few exceptions. In Sept. 2020, the California legislature passed Assembly Bill 2257, which rewrote a number of the requirements of AB5 and exempts a substantial list of job categories.

California's AB5 expanded on a ruling made in a case that reached the California Supreme Court in 2018, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. In the 2018 Dynamex case, the California Supreme Court ruled that companies must use a three-pronged test (known as the ABC test) in determining whether to classify workers as employees or independent contractors. This test assumes that workers are employees unless the company that hires them can prove the following three things:

  1. The worker is free to perform services without the control or direction of the company.
  2. The worker is performing work tasks that are outside the usual course of the company’s business activities.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This test holds companies to a higher standard in proving workers are independent contractors than was previously used in California. AB5 made this test the new gold-standard requirement for all companies in the state. But it was designed to regulate companies that hire gig workers in large numbers, such as Uber, Lyft, and DoorDash.

Uber and Lyft resisted the requirements of AB5 and, on Aug. 10, 2020, California Superior Court Judge Ethan Schulman ordered the companies to reclassify their contract drivers as employees with the same protections and benefits as their other staffers. That entitled them to workers comp, unemployment insurance, paid sick and family leave, and health insurance, among other employee benefits. "To state the obvious, drivers are central, not tangential, to Uber and Lyft's entire ride-hailing business," Judge Schulman wrote. The case was filed by the Attorney General of California, joined by the City Attorneys of Los Angeles, San Diego, and San Francisco.

Gig workers and companies that hire them in other states should pay close attention to AB5. Illinois has considered legislation that mirrors its guidelines. In New York, plans are in the works to introduce legislation that would protect gig workers on a similar scale.

AB5 Impact on Workers

The most immediate implication of AB5 and its one-two-three test is that it turned some independent contractors into employees. “The key factor for gig companies is ‘2,’ which says that anyone performing work for a company that is the same as the business of that company is presumed to be an employee,” says Danielle Lackey, chief legal officer at Motus, which provides reimbursement solutions for businesses with mobile-enabled workforces.

Lackey says that, under the bill, if employers begin classifying gig workers as employees, it means these workers will be entitled to a minimum wage, expense reimbursements, health insurance, rest breaks, and the other benefits afforded to employees under California state law. In that sense, the bill creates a level playing field between those working in the gig economy and those hired as regular employees.

There are potential downsides, however—if gig workers who are treated as employees are, because of this, expected to adhere to a new set of standards regarding how they perform their work. For example, one major appeal of being a gig worker is the ability to choose when and when not to work.

Pros
  • Creates a level playing field between gig economy workers and those hired as regular employees

  • Entitles workers to a minimum wage, employee benefits, and other perks

Cons
  • Potential loss of flexibility in regard to hours for reclassified workers

  • Reclassifying costs could raise prices for consumers

As an employee, a former gig worker may lose that choice. “Certain people are very attracted to this type of work and flexibility and will most likely drop out, as they may not like fixed schedules or other rules and requirements,” says Elliot Dinkin, president and CEO of Cowden Associates, a Pittsburgh-based consulting and actuarial firm.

Lackey says AB5 doesn’t mandate the elimination of flexibility altogether. “But if employers begin incurring the greater cost of paying for employees instead of contractors, they may decide to take advantage of the ability this gives them to exert more control.”

AB5 Impact on Businesses

The signing of California AB5 into law affects many, but not all, businesses that rely on gig workers in California. Examples of the types of professions and businesses that are exempt include insurance agents, attorneys, real estate agents, and certain types of business-to-business contractors and referral agencies. Companies that are not exempt will have to take a closer look at how they classify employees and independent contractors to ensure that they’re not violating the terms of the bill.

For companies that do reclassify gig workers as employees, the question of how easy the transition will be centers on cost. If companies now have to pay a minimum wage, offer paid time off and health insurance, and pay unemployment insurance and worker’s compensation benefits for this new crop of employees, that could have a significant impact on the bottom line.

AB5 put ride-sharing and delivery companies, such as Uber, Lyft, and DoorDash, in the spotlight. Some analysts suggested that the cost of reclassifying gig workers as employees would potentially bankrupt both companies, destroying the gig worker business model in the process. Dinkin says that if companies want to preserve their profit position, then the additional costs of reclassifying will likely be passed on to the consumers who use their services.

50+

The number of businesses and professions exempted from AB5.

AB2257 Exempts Many Workers From AB5

The controversies surrounding AB5 became so intense that, on Sept. 4, 2020, the California legislature passed—and Governor Gavin Newsom signed—Assembly Bill 2257, which went into effect immediately and rewrote a number of the requirements of AB5.

It exempts a long list of job categories from AB5. Among those exempted from the strictures are still and video photographers and editors, freelance writers, content contributors, editors, translators, fine artists, and musicians. One key change was the removal of caps for categories of freelancers that had limited the number of contributions they could make to an outlet, such as a website, without having to be reclassified as employees.

However, workers for gig-economy companies such as Lyft and Uber were not exempted.

A detailed blog post from law firm Seyfarth Shaw LLP noted that AB2257 broadens the business-to-business exemption of AB5, creates an exemption for individual business people who contract with each other, exempts more referral agencies, increases the number of professional exemptions to AB5 (including special provisions for the music industry), and provides wider enforcement powers for district attorneys.

Legal actions that are already underway "may yet affect the scope of AB 2257’s application," the Seyfarth post noted. The post's authors also pointed out that—rather than lobby for additional exemptions—companies not covered by AB 2257 "may choose to follow the lead of transportation platform companies, which are funding a ballot initiative (Proposition 22) to create a new class of workers applicable to drivers, if their efforts prove successful."

And those efforts did indeed prove successful on Nov. 3, 2020, when Proposition 22 passed.

Proposition 22 and AB5

Almost as soon as AB5 passed, Uber, Lyft, and DoorDash began to work to unravel it. They responded by heavily supporting California Proposition 22, a ballot initiative that legally designated drivers for app-based ride-hailing and delivery apps as independent contractors. Thanks to their efforts to garner signatures, the measure did get on the ballot in the November 2020 state general election—and was approved, with the support of 58% of California voters.

Prop 22 declares app-based drivers to be independent contractors, not employees—though it does provide certain "engaged time" protections for them, such as healthcare subsidies, and accident and accidental death insurance.

Prop 22 essentially overrode AB5 on the question of whether app-based drivers are employees or independent contractors.

However, on Aug. 20, 2021, Alameda County Superior Court Judge Frank Roesch ruled that two sections of Proposition 22 were unconstitutional and that the measure as a whole was unenforceable. Uber and Lyft announced they would appeal, and Prop 22 remains in effect as the court battles continue.

What Is the ABC Test?

The ABC test is a three-pronged test to determine whether to classify workers as employees or independent contractors. It assumes that workers are employees unless the company that hires them can prove the following three things. One, the worker is free to perform services without the control or direction of the company. Two, the worker is performing work tasks that are outside the usual course of the company’s business activities. Three, the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

What Is the Gig Economy?

The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform. It can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles. At the same time, the gig economy can have downsides, due to the erosion of traditional economic relationships between workers, businesses, and clients.

How Does AB5 Impact Workers?

The most immediate implication of AB5 is that it turned some independent contractors into employees. This means these workers will be entitled to a minimum wage, business expense reimbursements, employee benefits, rest breaks, and the other benefits afforded to employees under California state law. However, a gig worker may lose flexibility in choosing when and when not to work.

How Does AB5 Impact Businesses?

It centers on cost. If companies now have to pay a minimum wage, offer paid time off and health insurance, and pay unemployment insurance and worker’s compensation benefits for this new crop of employees, AB5 could have a significant impact on their bottom line.