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, with some exceptions.

Key Takeaways

  • California Assembly Bill 5 (AB5) extends employee classification status to some gig workers.
  • 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 Calif. 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 Door Dash that legally designates drivers for app-based ride-hailing and delivery apps as independent contractors.

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 Calif. 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 companies that hire workers in the state of California.

AB5 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, 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.

Uber and Lyft responded by heavily supporting California Proposition 22, a ballot initiative that won in the November 2020 general election with the support of 58% of California voters. The initiative declares app-based drivers to be independent contractors, not employees, and provides certain "engaged time" protections for them, such as healthcare subsidies, accident and accidental death insurance.

Following controversy over the bill, the Calif. legislature passed Assembly Bill 2257 in Sept. 2020, which exempts a long list of job categories from AB5. 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 apps as independent contractors.

Gig workers and companies that hire them in other states should pay close attention to the bill’s reception. Illinois has considered legislation that mirrors the guidelines established by AB5. 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, employee benefits, 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

  • Workers entitled to a minimum wage, employee benefits, and other perks

Cons
  • Potential loss of flexibility in regard to work hours for gig workers reclassified as employees

  • Cost of reclassifying gig workers as employees 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 including 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.

New Calif. Law—AB2257— Exempts Many Workers From AB5

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

Frequently Asked Questions

What Is the ABC Test?

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 AB5 Impacts 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, expense reimbursements, employee benefits, 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. However, a gig worker may lose the option to choose when and when not to work.

How AB5 Impacts Businesses?

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.