As of January 1st, California companies that employ independent contractors will be required to reclassify them as employees, a landmark change that’s already posing challenges for many organizations. Where legal employment requirements were relatively vague before, now they are straightforward, necessitating a stricter standard of proof from companies.

This extension of employee classification status to gig workers, known as Assembly Bill 5 or AB5, has been years in the making, as corporations that are heavily-reliant on independent employees, like Uber, Lyft, and DoorDash, continue to flourish.

While you may not be at the helm of a multinational technology company, AB5 is still likely to impact your organization. Here’s a breakdown of the law itself, as well as the effect it will have on both your business and the workforce as a whole.

Do You Meet These Requirements?

Companies must now use a three-part test to determine whether their workers should be classified as employees or independent contractors, and employee classification will not convert on its own; employers are responsible for the reclassification of their existing workforce if employees don’t meet these requirements. All workers will be considered employees unless an organization is able to prove each of these three things:

  • The worker is free to perform services without the control or direction of the company;
  • The worker is performing work that is outside the usual course of the company’s business;
  • And the worker is engaged in an independently established trade, occupation, or business.

Penalties for Misclassification

There are several California agencies that will be reviewing employee classifications, including the California Labor Commissioner, Employment Development Department, and Franchise Tax Board. Employers that are found to be non-compliant with AB5 face potential fines, along with having to compensate for back pay and benefits. They are also eligible to receive a civil penalty of up to $25,000 per violation if found to be willfully misclassifying workers.

Drawbacks to the Legislation

This bill has faced major backlash from employers, mainly centering around one pertinent gripe: cost.

Transitioning independent contractors to employees comes with a host of expensive ramifications, like paying minimum wage, offering health insurance, and covering workman’s compensation – basic benefits that are just the tip of the iceberg in many cases. For organizations that depend on gig workers for their operations, this switch can be detrimental to their functions; some ride-sharing and delivery corporations are facing potential bankruptcy due to the exorbitant price of reclassification. Plus, these same employers fear they’ll lose the element of flexibility, a factor which many have relied heavily upon to attract workers, once AB5 is enforced.

Exemptions from the Bill

The law’s expensive price tag is the primary reason that, before being passed last September, AB5 was the subject of much controversy, inciting countless lobbying efforts. As a result, more than 50 professions or types of businesses are exempt from the legislation. These include doctors, dentists, insurance agents, lawyers, accountants, real estate agents, hairstylists, and a multitude of creative occupations.

How to Prepare Your Business for California’s New Assembly Bill

With the implementation of AB5 on the horizon, it’s imperative that you develop and execute a plan to safeguard your company. Managing your own workforce is no easy task – luckily you don’t have to tackle it alone.

My team members at KORE1 are well-versed when it comes to the ins and outs of employee reclassification; we work hands on with this legislation every day. We’ve helped countless leaders navigate their organizations through challenges as a result of AB5, and we’re here to help you too.

Let’s talk about the unique risks that AB5 poses for you, and how KORE1’s experts can help you overcome them. Reach out to me directly at tanya@kore1.com or through our website!

 

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