What is California Assembly Bill 5?
Assembly Bill 5 (AB 5) may forever change how companies engage independent talent to provide services in California. Effective January 1, 2020, AB 5 restricts the classification of an independent contractor to those individuals able to meet all three requirements of the following “ABC” test:
A) Being free from the control of the company they are working for.
B) Performing work that’s outside the course of the company’s usual business.
C) Having their own independently established trade, occupation, or business.
AB 5 codifies and expands on the 2018 California Supreme Court Dynamex decision. In 2004, Dynamex— a nationwide same-day delivery service— converted all of its drivers from employees to independent contractors, leading to litigation initiated by a former employee. The Court embraced a standard presuming that all workers are employees, not contractors, and placed the burden on employers to establish the appropriateness of classifying an individual as an independent contractor based on the newly adopted “ABC” test.
Under AB 5, classification as either an independent contractor or an employee affects the applicability of labor laws such as minimum wage, overtime pay, and workers’ compensation. State and cities will have the right to file suit against companies over misclassification, overriding common arbitration agreements currently in use.
While other states have adopted rules aimed to extend benefits to independent contractors, California’s bill is arguably the strongest in the nation and is likely to set a precedent for legislation pending in other states.
Field Nation is enhancing our marketplace to evolve along with these new regulations. On January 1, we will add visibility to technicians that have been registered as an employee of a business. The companies employing these technicians must also confirm they have the following:
- An Employer Identification Number (EIN)—a nine-digit number assigned by the IRS to identify taxpayers required to file business tax returns.
- Three or more employees and that the technician is a W2 employee of that company.
- A worker’s compensation insurance certificate.
Tips For Navigating Upcoming Regulatory Changes
Field Service Companies
As the regulatory environment continues to evolve, here are a few best practices for being a good partner with independent contractors:
- Use contractors for short-term and defined work assignments.
- Be clear and reasonable about your expectations
- Pay contractors on time and offer a fair and competitive rate.
New regulations introduce changes that need to be assessed and minimized. If you are unsure of whether the work you are asking to be performed or the applicable worker classification violates AB 5, we highly recommend consulting with legal representation to determine the best path forward for your business.
While AB 5 will likely require additional steps to ensure compliance, it also offers an opportunity for service companies to secure new business in the state of California.
Our team will be working with service companies over the coming weeks to confirm that they meet the “Prong C” (independent business or trade) requirements, including an Employer Identification Number (EIN), worker’s compensation insurance, and employing three or more people.
Independent contractors will continue to be supported on our platform. Since the regulation is related to the type of work being performed, companies will still be able to compliantly engage with an independent contractor. Some field service organizations may prefer to do business with employees rather than individual contractors. For these instances, we see this as an opportunity for technicians to create their own service business.
Whether you’re a field service organization, service company, or independent technician, we believe it’s our responsibility to help you navigate the evolving regulatory environment, make informed choices, and continue to engage with or provide on-demand service work in California.