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David H. Schwartz Dec. 22, 2020

California’s enactment of AB5, the law that reshaped independent contractor status in the state, went into effect on January 1, 2020. While the law remains in its infancy stages, so to speak, employers statewide need to review the effects that this redefinition will have on their business operations.

For instance, many employers may not realize that anyone working for their business that has been classified as an independent contractor can — given a three-part status test codified in AB5 — sue you for full employee status and lost wages and benefits?

If you live in or around the San Francisco area, the Law Offices of David H. Schwartz, INC. is proud to provide sound legal guidance and protect companies facing business litigation matters for more than four decades. If you’re experiencing any difficulties related to AB5, you can rely on attorney David H. Schwartz to provide reliable legal counsel and representation as you seek the best possible outcome for your situation.

Employee Classification and AB5: The Background

Following a California Supreme Court decision, AB5 was introduced to correct the alleged misclassification of over one million workers labeled as independent contractors in the state. Under the law, workers must be classified as employees rather than independent contractors if their job duties constitute part of the company’s core business.

AB5 would thus entitle newly categorized employees to benefits and pay guarantees, such as minimum wage, overtime, paid sick time, and meal breaks, along with the ability to organize into a union.

Two of the largest targets of the legislation were ride-share companies Uber and Lyft, which utilize freelance drivers to run a taxi-like operation. The two companies immediately launched a petition drive to get a ballot referendum to exempt them from compliance. On November 3, 2020, they were successful, as Proposition 22 was approved by voters.

Proposition 22 exempts Uber and Lyft from AB5, but at the same time provides increased compensation and some benefits, including health care subsidies.

AB5, the ABC Test, and Limited Exemptions

AB5 was drafted to codify the State Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which established a three-part test for classifying employees and independent contractors. This has come to be known as The ABC Test.

Under the ABC Test, to be classified as an independent contractor, the worker must:

  1. Be free from the control and direction of the hiring entity in performing their work; and

  2. Be performing work that is outside the usual course of the hiring entity’s business; and

  3. Be customarily engaged in an independently established trade, occupation, or business that routinely performs the type of work called for under the hiring arrangement.

In short, all workers are to be considered employees until and unless the hiring entity can prove the worker is truly independent.

Given these parameters, AB5 also exempted certain professional occupations, including physicians, surgeons, lawyers, architects, engineers, licensed accountants, commercial fishermen, and veterinarians.

Certain professional services were also exempted provided they maintain a bona fide business location and negotiate their own rates. These services include marketing, human resources outsourcing, travel agency work, graphic design, art services, photography, and freelance writing.

Understanding The Risks andPenalties for AB5 Violations

Perhaps the biggest risk and potential liability is legal action by governmental entities or even by the workers themselves. Since AB5 was codified under the California Labor Code, violations fall under the Labor Code Private Attorneys General Act. This law allows aggrieved workers, current or former, to file lawsuits for lost pay and benefits. In addition, the California Attorney General and some city attorneys can also bring claims on behalf of workers.

At the same time, if an independent contractor is reclassified as an employee, the employer will be liable for any past taxes that were due under employee status.

Finally, under California Labor Code section 226.8, willful misclassification as an independent contractor can result in civil penalties ranging from $5,000 to $25,000 per violation. Willful means to voluntarily and knowingly misclassify an employee as an independent contractor.

How the Law Offices of David H. Schwartz Can Help

For over 45 years, the Law Offices of David H. Schwartz, INC. has been advising and representing businesses in the San Francisco area, or nearby in Santa Clara, San Jose, Oakland, San Mateo, and the surrounding communities. Attorney David Schwartz has extensive experience helping clients understand the laws that can potentially affect their business, as well as helping them exercise their rights under the law.

If you find yourself in a dispute with the government or workers over AB5 and independent contractor status, contact the firm today for a consultation. Attorney David H. Schwartz will discuss your situation, assess the best strategy going forward, and provide sound legal guidance and representation as you pursue the best possible outcome for your case.