Contractors Treated as Employees in California Bill

NSTPInternal Revenue Service (IRS)

Contractors Treated as Employees in California Bill

Contractors Treated as Employees in California Bill

BY CHRIS VEST, CAE / SEP 13, 2019

A groundbreaking bill passed by the California Senate extends labor protections and employee benefits to many workers previously considered contractors. Associations that use freelancers in the state may need to reclassify them as full-time employees starting in 2020.

Passed by the California Senate on September 10, AB 5 would extend labor protections and employee benefits like healthcare, overtime, and minimum wage to many workers formerly considered contractors. The measure is expected to be signed by California Governor Gavin Newsom and go into effect January 1, 2020.

Starting then, businesses that use freelancers in California may need to reclassify these workers as full-time employees entitled to employee benefits. This would apply not just to businesses headquartered in California, but any U.S. business that employs contractors in California.

The legislation was written by Assemblywoman Lorena Gonzalez, who is a labor advocate and a candidate for California Secretary of State in 2022. Gonzalez said she wants to codify a 2018 state Supreme Court ruling that said contract workers at delivery company Dynamex were entitled to the benefits of regular employees. The court decision created the “ABC” test to help classify workers in California.

Though it would impact a broad range of industries, Gonzalez’ primary target in creating the legislation are app-based employers like Uber, Lyft, Postmates, and others that classify their drivers as freelancers and do not provide employee benefits like sick time or health insurance.

“Today the Legislature made it clear: we will not in good conscience allow free-riding businesses to profit off depriving millions of workers from basic employee rights that lead to a middle-class job,” Gonzalez said. “It’s our duty to look out for working men and women, not Wall Street and their get-rich-quick IPOs.”

The bill exempts some occupations, including doctors, dentists, lawyers, engineers, accountants, architects, and realtors. But for many others, the bill makes the “ABC” test the standard for determining employment status in California.

The test is far stricter than federal regulations for determining employment status. It states that a worker can only be considered an independent contractor if they are: free from the “control and direction” of the company they work for; performing work that is “outside the course” of the company’s usual business; and have their own independently established trade, occupation, or business.