AB 5 Update
Editor’s note: There’s so much misinformation about the state of AB 5, that we asked Karen Anderson, founder of Freelancers Against AB 5, for an update.
- AB5 has not been overturned. It is still the law and continues to wreak havoc across a vast swath of professions and sectors in California—everything from performing arts, event planning and tutoring to transcription, independent filmmaking, community theater, and videography.
- Prop 22 did not repeal AB5, nor did it exempt the entire “gig economy.” Passed by nearly 60 percent of the voters in November 2020, Prop 22 was a ballot initiative that provided an exclusive carve-out for on-demand rideshare and app-based delivery services only. The so-called “gig economy” includes many other sectors such as domestic work, tech, and all manner of work available via online platforms, all of which are NOT exempt via Prop 22.
- In August 2021, a judge in Alameda County ruled Prop 22 unconstitutional. The rideshare and app-based delivery industry appealed the ruling, and in March 2022, the Court of Appeal upheld most of Prop 22. As of October 2023, SEIU is appealing the decision with the California Supreme Court, which has agreed to hear the case.
- Truckers were allowed to be independent contractors for almost 2 ½ years after the passage of AB5. The trucking industry had a preliminary injunction against the enforcement of AB5 on the trucking sector from January 2020 until June 2022 when ongoing legal challenges came to an end after SCOTUS declined to hear the case on appeal. The preliminary injunction was dissolved and the Ninth Circuit’s ruling against California Trucking Association’s lawsuit prevailed. AB5 is now officially in effect on the trucking sector. CTA and OOIDA (Owner-Operator Independent Drivers Association) are currently seeking another injunction from the same judge who issued the first one in 2020.
- Passed in September 2022, the “cleanup bill” AB2257 added a few more exemptions for chosen professions and some “clarifications” to some of the ambiguous language in AB5. There are still hundreds of categories of professions left out in the cold, however, and AB5/AB2257 remains as convoluted as ever.
- There are almost 100 exemptions in AB5/AB2257, but most of them come with caveats and fine print. Just because a certain profession has received an exemption doesn’t mean that the exemption can be taken advantage of. Many of the exemptions are “partial” and must meet up to 13 requirements in order to bypass AB5’s ABC test. Some professions like doctors, lawyers and real estate agents received blanket exemptions from the ABC test, but regardless, all independent contracting relationships must still pass California’s traditional Borello worker classification multi-factor test, which is more flexible than the ABC test and has been in effect since 1989.
- Having an LLC or SCorp does not exempt anyone from AB5, nor does it protect a hiring entity from fines and penalties if the IC they contracted with is deemed to be misclassified, regardless if the IC has an LLC or SCorp.
- AB5 does not force a business to actually hire their ICs as W-2 employees, nor does it require that the employee be fulltime, thereby receiving benefits. More often than not, businesses will terminate their IC contracts rather than hire someone full-time or part-time. It’s irrelevant how many hours the IC is working either. Even a one-off who only works for a day or an hour could be misclassified and would need to be put on payroll. This especially affects the events industry and the performing arts sector.
- Conducted by California’s Employment Development Department (EDD), worker classification audits (payroll tax audits) take place on one-person businesses and mom-andpops. It doesn’t matter how small your business is, how few ICs your business has contracted with, or how often, a business can be subject to a very costly and aggressive audit.
- The onus is on the hiring entity to prove that its contracting relationships comply with AB5. The freelancer is not the one who is penalized for being misclassified, it’s the hiring entity.
- Penalties and fines for misclassification include $10,000 workers’ comp fines, payment of back taxes, back wages, overtime, breaks, back benefits, expense reimbursements and more. Civil penalties range from $5,000 to $25,000 per violation for willful misclassification.
- The main trigger for the EDD to initiate an audit is if a hiring entity’s IC erroneously applied for unemployment insurance benefits and named the client as the employer. Other triggers include workers who are injured on the job; a retaliatory claim by a disgruntled worker; a competitor reporting a business for misclassification; or an ex-spouse seeking hidden income owed for alimony or child support.
- Enforcement agencies include state agencies, city attorneys, district attorneys, labor commission, attorney general of the state of California, and the EDD. The Division of Labor Standards Enforcement also conducts investigations into worker misclassification cases.
- Although there are ABC tests in a couple dozen states, California has the strictest ABC test in the nation. Most ABC tests in other states apply only to one aspect of their labor codes, such as unemployment insurance. Many of these ABC tests have a two-part B-prong that is more flexible than California’s infamous B-prong, which states that the worker is assumed to be an employee unless the work is performed “outside the usual course of the hiring entity’s business.”
- A California-based business can contract with out-of-state independent contractors so long as the work is not being done in California. An out-of-state business must adhere to AB5 when contracting with ICs based in California.
- The ABC test of AB5 is about 74 words, while the rest of the law totals more than 5,000 words that address exemptions, enforcement, restrictions and caveats.
- California’s ABC test was first established by the California Supreme Court in the Dynamex decision in April 2018. The ABC test of Dynamex applied to wage orders only (breaks, overtime, minimum wage). When AB5 was passed in September 2019, the California state legislature codified and expanded the ABC test beyond the wage orders to include all provisions of the labor and unemployment insurance codes, thereby controlling the entire independent workforce.
- AB5 was sponsored by California Labor Federation, the largest labor organization in the state representing 1,200 unions and 2.2 million members. The author of AB5, former Assemblywoman Lorena Gonzalez (D-SD), now leads the California Labor Federation. Her husband, former San Diego Supervisor Nathan Fletcher, is currently being sued by a former public relations director of the Metropolitan Transit System for workplace sexual assault and harassment. Gonzalez is named in the complaint as having been complicit in attempting to silence the alleged victim.
- On March 17, 2023, a three-judge panel of the Ninth Circuit issued a scathing rebuke of Lorena Gonzalez’s actions and animus when crafting AB5, stating it is probable that AB5 violates the equal protection clause under the 14th Amendment. Brought by Uber and Postmates in 2019, the case (Olson v. the state of California) was to be sent back to the lower court that had dismissed it outright in February 2020, but the state of California is currently seeking an “en banc” review from the Ninth Circuit.
Karen Anderson is freelance writer, managing editor, photographer, and founder of Freelancers Against AB5