How to navigate California’s AB5 as a small business or company


  • California Assembly Bill 5 (AB5) went into impact on January 1, 2020, and it requires employers to adhere to a stricter definition of “independent contractor.”
  • If a employee is incorrectly categorized, there might be vital fines — which may vary from $5,000 to $25,000.
  • All California-based companies or corporations that do business in California ought to consider their contractors towards the ABC check. 
  • If the contractor doesn’t meet all three elements of the ABC check, they will both attempt to change the present work association to allow them to be categorized as an impartial contractor or make them an worker. 
  • Visit Business Insider’s homepage for extra tales.

California Assembly Bill 5  — mostly referred to as AB5 — went into impact on January 1, 2020. 

At its core, the primary goal of AB5 is to guarantee employers appropriately classify their employees and stay accountable to a stricter definition of “independent contractor.”

To adjust to AB5, each employee — excluding these in exempt occupations like healthcare professionals, funding advisors, and direct salespersons — is now topic to the ABC check. If they meet all three , they’re thought of an impartial contractor. If they do not, they need to both be transitioned to worker standing or the work association has to change.

The intention of the invoice is to stop employers from taking shortcuts to get monetary savings — nationwide, incorrectly classifying impartial contractors resulted in over $44 billion in unpaid taxes from 2008 to 2010 — and to present employees who ought to be categorized as staff with the rights they deserve, such as healthcare, employees’ compensation, paid break day, incapacity depart, and extra.

While some employees will profit vastly from the passing of AB5, others hope to stay impartial for a variety of causes. And many corporations aren’t too proud of the invoice, both.

Rideshare behemoths Uber and Lyft claimed in 2019 that AB5 might ship them out of business. Their two million drivers are all impartial contractors — making them full-time staff can be financially devastating.

Uber, Lyft, DoorDash, and others not too long ago created and funded Proposition 22, a poll measure meant to exempt these main corporations from AB5 and permit them to proceed classifying drivers and supply employees as contractors. Uber, Lyft, and DoorDash have backed Prop 22 with $30 million.

If you are a California business — or do business in California — it is best to do every thing you may to be sure you’re compliant with AB5. If you do not, there may very well be vital penalties.

Emily D. Baker, California lawyer and host of "Get Legit Law and Sh!t" podcast

Emily D. Baker.

Emily D. Baker


“Business owners need to be mindful that the Franchise Tax Board will be auditing businesses going forward, and they can collect the back payroll taxes owed, plus interest, fines, and penalties,” stated Emily D. Baker, a California-based lawyer and host of the “Get Legit Law and Sh!t” podcast.

And in accordance to Baker, these aren’t meager fines by any means. For every employee who’s misclassified, the employer might be fined wherever from $5,000 to $15,000. And in the event that they discover that you’ve a behavior of doing this, that vary is bumped up to $10,000 to $25,000. 

Here are the steps it is best to take as a small or massive business that employs contractors and freelancers in California.

Step 1: Evaluate the standing of your present impartial contractors

First and foremost, you — and all members of your management workforce — want to familiarize your self with the regulation. Don’t hesitate to seek the advice of with an employment lawyer to enable you perceive the ins and outs of it. And if counsel is not within the price range, there are different choices, too.

“Small business owners with particularly limited in-house resources don’t have to tackle complex compliance issues all on their own,” stated Michael Cole, employment counsel at Gusto, a California-based payroll, HR, and advantages platform. He added that there are lots of reasonably priced on-line assets that may assist.

Michael Cole, employment counsel at California HR and payroll platform Gusto

Michael Cole.

Michael Cole.


“As business owners consider HR technology, it’s important to look for solutions that offer tools, features, checklists, and templates designed to keep them on track when it comes to compliance,” Cole stated. “Additionally, some may want to consider a platform that includes support from certified HR professionals.” Some further HR instruments like Gusto you can contemplate are: Zenefits, ADP, Rippling, and Workday HCM, amongst others.

Whether you are doing it by yourself or having somebody enable you, you want to analyze the position of each single impartial contractor you use. 

First, test to see in the event that they’re exempt. (A listing of exempt occupations is included within the textual content of the invoice.) Even in the event that they’re exempt, they’re nonetheless topic to the Borello check, which has 11 elements. Unlike with the ABC check, through which all three elements have to be met, no single merchandise of the Borello check is determinative. The important purpose is to be sure that employees management when and the way they do their work. If they do not cross the Borello check, then you may contemplate the identical choices you’ve for non-exempt employees who do not cross the ABC check.

Step 2: Apply the ABC check to those that aren’t exempt

The ABC check consists of the next three standards:

  1. The employee have to be free from the hiring company’s management in how and once they do their job.
  2. The employee should carry out work outdoors of the hiring company’s core business.
  3. The employee is usually engaged in an independently established commerce, occupation, or business of the identical nature as the work carried out for the hiring entity.

In regards to what a company’s core business is, Elliot Dinkin, president and CEO of Cowden Associates, a compensation, well being and advantages, and retirement consulting agency, stated, “Core business is one that’s central to generating the larger share of revenues and is instrumental to the primary function of business.”

Elliot Dinkin, president and CEO of consulting firm Cowden Associates

Elliot Dinkin.

Elliot Dinkin


Uber, for instance, at present would not cross AB5 as a result of transportation is taken into account a part of their core business. Without drivers, transportation by automotive is tough. (Though they’re nonetheless working laborious on self-driving automobiles). The rideshare big, nevertheless, argues that their core business is offering the software program that drivers and riders leverage. 

What to do in case you consider an impartial contractor meets all three necessities of the ABC check

Be very nicely ready to show and again your reasoning in case you get audited.

“Strengthen your position to ensure solid footing exists and enforce your position through communications, operations, and related activities,” Dinkin stated.

One method to do that is by requiring your whole contractors to current strong proof that they are an independently established company. Encourage them to create an easy-to-search web site for his or her business, clearly stating how they are often contacted and offering a checklist of shoppers they’ve labored for or are at present working for (with every shopper’s permission, in fact).

For freelancers — writers, designers, editors, and so forth — hold shut monitor of what number of items each has submitted all year long. With the passing of AB5, freelancers can not submit greater than 35 items to a single publication inside one yr. If they do, they’re technically thought of an worker. Establish an inner monitoring system and encourage your freelancers to hold monitor, too. On every submission and/or bill, for instance, they may notice what quantity submission it’s (“4/35 for 2020,” for instance).

In addition, “communicate clearly with [your freelancers] to make sure they’re clear on what counts as a submission,” Baker stated. You want to be clear, for example, if a multipiece story is one submission or extra, as well as to specifying what number of rounds of edits a single submission consists of.

“Clear internal policies will put publications in the best position to defend themselves if they’re audited over AB5,” Baker stated. “You can’t go wrong with documentation and clear communication.”

What it is best to do if somebody would not cross the ABC check (and is not exempt from it)

If certainly one of your impartial contractors would not meet all three elements of the ABC check, one thing wants to change. Here are two paths you may select from:

1. Make adjustments to your work settlement

Look on the elements of the ABC check that the contractor did not meet. Are there any adjustments you may make to your present work association that can enable them to be categorized as an impartial contractor?

For occasion, in the event that they did not meet half A since you inform them sure hours and days they’ve to work, are you able to relinquish some management? Perhaps they nonetheless do the identical work, however they select once they full it — you simply inform them the deadline.

Or, say they did not meet half B as a result of a part of their work is taken into account core to your business. Can these duties be redistributed to a present worker, leaving the contractor with duties that are not crucial to the business?

If a freelancer you use at present would not classify as an impartial contractor as a result of they submit greater than 35 tasks a yr, you will want to lower their variety of assignments (and ensure to monitor them!).

Again, it is clever to seek the advice of with an professional (or leverage some HR know-how) for this. You need to make it possible for any adjustments you make to correctly classify somebody as an impartial contractor are literally compliant.

2. Reclassify them as an worker

If the above is not doable, or if the impartial contractor is not open to having their sort or quantity of labor modified, contemplate making them an worker.

However, “[you’ll] need to factor in the costs and logistics of doing so, particularly when it comes to increased wages and benefits,” Cole stated. And put together your self for any questions and pushback your impartial contractors might have.

“Some contractors who are reclassified may not welcome the change, while others may ask about whether they’ll be paid some form of back pay or other compensation for previously being treated as a contractor [when they shouldn’t have been],” Cole added.

Of course, reclassifying somebody as an worker is not as easy as simply checking a field. You’ll want to undergo the official hiring course of and determine how a lot cash you may dedicate to their position for wage, advantages, taxes, and different related prices.

Jennifer Hwang, chief strategy officer at gig platform Tilr

Jennifer Hwang.

Jennifer Hwang


This is a tough spot for a lot of companies to be in, however to keep away from doable disastrous audit outcomes, take motion as quickly as doable and guarantee each impartial contractor you’ve is appropriately categorized. If they are not, both readjust their position, convey them on as an worker, or half methods with them fully.

“Organizations should strategize and build out an action plan best suited to their particular circumstances,” stated Jennifer Hwang, the chief technique officer at gig platform Tilr. “Being educated and executing on a plan to ensure compliance with the law is prudent not only for California-based businesses, but also any non-California businesses that have work being conducted or done in California.”

This article was initially printed on Business Insider on January 23, 2020. It has been up to date with new info.



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