Legal measures taking aim at the relationships between contracting companies and independent contractors are all the rage across the U.S., from California’s Assembly Bill 5 (AB5) to new and emerging laws and legal rulings in New Jersey, New York, Pennsylvania and more. If your business uses a 1099 workforce, you might be wondering, what can I do?
This article breaks down five essential elements of AB5 and similar legislation for business owners around the country.
1. The ABC Test is now law
California Assemblywoman Lorena Gonzalez introduced AB5, which passed in September 2019 and took effect in January 2020. This state statute codifies into law a landmark California Supreme Court case, Dynamex Operations West, Inc. v. Superior Court.
In the Dynamex case, the court adopted the ABC test, a guide that employers must use to determine whether a worker is an independent contractor or a traditional employee. Independent workers are classified as:
- Not directed or controlled by the hiring company in connection with the performance of the work or in writing.
- Performing work outside the course of the hiring company’s usual business.
- Engaged in an independent trade, occupation, profession or business.
AB5 adds the ABC test to California state law, placing the burden on hiring entities to prove that workers are ICs rather than employees by default. But many states use some form of this test at the agency level, which makes it more difficult for contracting companies to classify workers as independent contractors. The B prong in particular can be tricky to prove in many industries, including transportation, where both parties often provide services related to transporting people or goods.
2. Other states are following California’s lead
After California’s success in passing legislation designed to reshape the gig economy, other states began to follow suit.
In New Jersey, Governor Phil Murphy recently signed several bills claiming to protect the rights of ICs and requiring the companies they work for to pay payroll taxes. The new laws seek to penalize employers for misclassification, mandate that employers post notices describing misclassification, and allow stop orders against employers for violating state wage, benefit or tax law.
In Pennsylvania, UberBLACK drivers revived their lawsuit alleging that they’re employees based on the level of control exerted upon them by Uber. Remember, that’s the A prong of the ABC Test, though that test isn’t law in Pennsylvania—yet. If drivers win this case, it could have state- and nation-wide ramifications on ride-share app workforce models.
In addition, the U.S. House of Representatives recently passed the PRO Act, which makes it easier for employees to form and join unions that can negotiate contracts with employers. It is unlikely to pass in the Senate, but if it does, it will also make AB5 the law of the land.
All of this indicates a broader trend in the way legislators are thinking about the independent economy. So buckle up; there’s likely more to come.
3. The law may affect your business in unpredictable ways
Despite policymakers’ notion that the new legislation will positively affect all workers, it doesn’t benefit everyone. In fact, it’s detrimental and harmful to many ICs and businesses.
For instance, a small service business may contract with independent workers for special or occasional work. With the new law, the business may think their only option is to convert the workers to traditional employees. If the conversion doesn’t fit the budget (including W-2 taxes and benefits) or the business model, then the business may consider severing ties with those workers. In this scenario, the new legislation adversely affects both parties.
While AB5 exempts certain industries and professions from the ABC test, the transportation industry notably received no such exemption. This was particularly controversial considering the number of drivers and couriers who act as independent contractors. But lawsuits in response to AB5 have resulted in a temporary injunction on behalf of truckers, freeing them from AB5—for now.
4. It will also affect the ICs you work with
It’s important to understand that for many freelancers and independent contractors, their work status is a personal choice. In today’s progressive work environment, many members of the workforce are bucking traditional schedules and electing jobs that allow them the freedom to work as much as they want, when they want and how they want.
Two independent studies conducted in 2015 by the federal government showed that 85.2% of surveyed independent contractors did not want a different type of employment. The results revealed that 92% were satisfied with their jobs and 56.8% said they were “very satisfied,” whereas only 45.3% of full-time employees reported being “very satisfied” with their jobs.
These laws threaten their livelihoods, and as a result, ICs may become more difficult to find.
5. Technology can help you implement best practices
In this new landscape, when your business relies on an independent workforce, it’s critical to properly formulate contractual relationships to reduce harsh penalties and stay compliant with the law.
One potential way forward lies in AB5’s business-to-business exemption, which outlines 12 criteria for establishing a true business-to-business relationship between contracting companies and independent contractors. Although it only applies to California law, these detailed exemption criteria can provide a blueprint to help solidify contracting models across the U.S.
As you can tell, charting the choppy waters of the new legislation will be daunting. In conjunction with your legal counsel, you’ll need to define the best processes to mitigate your risks, but the good news is that the right technology or third-party administrator can make implementing those practices much, much easier. This can reduce the complexity of formalizing an arm’s-length contractor relationship. It can also take the headache out of contractor onboarding, compliance checks, payments and insurance.