Compliance Corner: AB-5 Passed in California. How Will Other States React?

On September 18, 2019, California governor Gavin Newsom signed into law AB-5, a stricter ABC Test to determine whether a worker is an independent contractor. Designed to convert thousands of independent contractors to employees, the law may make it more challenging for companies such as Uber, Lyft, and DoorDash that employ gig workers to classify their workers as independent contractors.  

Effect of AB-5 on California Employers 

If independent contractors in California need to be reclassified as employees, they will receive basic labor protections like minimum wage, overtime, and unemployment insurance. With such a significant increase in business expenses, companies may have to increase the cost of their products and services by as much as 20 to 30 percent. As a result, gig economy businesses may have to rethink their business models.    

Other States Reactions to AB-5    

Because California’s economy is the biggest of the U.S. states, legal and political developments there tend to have a ripple effect across other states. As a result, other states may pass legislation that makes it harder to classify a worker as an independent contractor. To be classified as an independent contractor under California’s ABC Test, a company must demonstrate that the worker is free from control and direction while performing services, performs work outside the usual course of the company’s business, and typically is engaged in an independently established trade, occupation or business. Since 20 other states already have implemented some form of the ABC Test, mostly about unemployment insurance or workers’ compensation claims, the passage of AB-5 could lead to changes in other states’ laws and claim types.  

New York’s Version of AB-5  

Labor experts in New York have been forming a coalition aimed at imposing independent contractor classification standards similar to California’s. New York Senator Diane Sevino stated that because tightening New York’s ABC Test may make it too rigid, implementing a portable benefits package may be a better way to grant more labor protections to independent contractors without classifying them as employees. However, New York Governor Andrew Cuomo favors classifying more independent contractors as employees. He believes that many companies go out of their way to hire independent contractors to avoid providing the labor protections they should. More attention to the labor rights of independent contractors is expected to be seen in the coming months.