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What Business Owners Need to Know About California Assembly Bill 5

 Posted on December 18, 2019 in Small Business Taxes

San Jose, CA small business tax attorney employee classificationCalifornia Assembly Bill 5, also called AB 5, has many business owners wondering how compliance with the new law will affect their business. The bill will significantly limit employers’ ability to classify workers as independent contractors. Many workers will now need to be classified as employees of the company, and they will be entitled to the associated benefits, such as workers’ compensation, minimum wage, overtime, rest breaks and meal periods, protection from anti-discrimination and retaliation laws, and reimbursement for business expenses incurred during the course of their job. Employers will also be required to pay payroll taxes on the workers classified as employees. AB 5 takes effect on January 1, 2020, so employers only have a short period of time to make any changes necessary to stay compliant with the new law.

AB 5 Makes the California Supreme Court Decision Regarding Worker Classification State Law

In 2018, the California Supreme Court announced its decision regarding Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The landmark decision established a test called the “ABC test” for determining whether a worker is an independent contractor or an employee. Under the new rule, a worker can only be classified as an independent contractor if the hiring agency can establish each of the following criteria:

  • The worker is not under the direction and control of the hiring agency with regard to the performance of the work.
  • The worker performs duties that are outside the hiring agency’s typical course of business.
  • The worker is engaged in an independently established occupation, trade, or business of the same nature as the work he or she does for the hiring agency.

California employers are already subject to the rules established by the Supreme Court Decision. The purpose of AB 5 is to clarify exactly how the ruling should be implemented in practice and identify industries that are exempt from the new rules. Doctors, psychologists, dentists, veterinarians, insurance agents, lawyers, accountants, architects, stockbrokers, real estate agents, state-licensed engineers, and private investigators will not be forced to comply with the new worker classification law. Newspaper delivery companies must comply, but they will be given an extra year before being required to classify their paper carriers as employees.

Concerns Over Increased Costs and Decreased Worker Freedom Prompt Opposition to AB 5

Opponents to AB 5 worry that the increased labor costs associated with classifying workers as employees will significantly increase the costs experienced by customers. The California Trucking Association filed a lawsuit challenging the Supreme Court ruling and AB 5. The association says that many drivers enjoy the freedoms that being independent contractors provide them, such as the ability to set their own driving schedules and profit from owning their own vehicles. An alliance of “gig economy” companies, including Doordash, Uber, and Lyft are advocating for a ballot measure that would permit them to continue classifying their drivers as independent contractors with the promise of increased rights for these workers.

Contact a San Jose, CA Business Attorney for Help

If you are a business owner, you probably have many questions and concerns about how AB 5 will affect you and what you need to do to comply with the new law. For help determining whether or not your business is subject to the rules imposed by AB 5, assistance with drafting independent contractor agreements, help with tax concerns, and more, contact John D. Teter Law Offices. Schedule a consultation with an experienced San Jose tax lawyer by calling our office at 408-866-1810 today.


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