The ABCs of AB5

2020 has been quite the year.  A worldwide Pandemic, social turmoil, election histrionics, and economic collapse with consequential unemployment, stay-at-home orders, and dispirited views on all of the above.   

It’s easy to forget that 2020 started with the implementation of an extremely controversial California law aimed at the ride-share industry and the general business trend toward Independent Contracting (IC) that gig economists predicted for some time.  

California Assembly Bill 5 (AB5) is viewed as an inspired, leading-edge protection mechanism for worker’s rights, and alternatively as an extreme overreach by liberal California politicians and collaborative unions meant to punish entrepreneurial energy and corral tax dollars.  

AB5 is a condensed yet strengthened version of the Borello Test used since 1989 – a way to determine whether someone should be legally viewed as an IC or a full-time employee.

To determine contractor status, the Borello test has 11 factors.  It primarily focuses on whether a company controls the means and manner of performing contracted work.  The test also includes additional factors, such as who provides work tools and the worker's opportunity for profit or loss.

AB5

Reflective of the landmark decision from 2018, Dynamex Operations West v. Superior Court of Los Angeles, the AB5 law is much simpler.  But it’s also more difficult to meet for those trying to supplement their company’s core competency with outside services.  Below are the 3 tests a worker must pass to engage independently.

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

A and C are Borello-esk and fairly uncontroversial.  The B Prong, as it is known, is a difficult hurdle for many non-exempt industries, in particular Trucking.   

Trucking

Trucking is significantly dependent upon the Owner Operator model, or at least one that supplements the employee model with contractors specifically needed to provide core services. 

A trucking company hiring an IC accounting person passes the “B Prong” portion of the test easily.  The same company hiring an Owner Operator to perform deliveries does not. Over 50 professions with significant IC infusion, like attorneys, physicians, dentists, hairstylists, and real estate agents were given exemption in the initial bill.  This was later supplemented with a compendium Bill (AB2257) to add exemptions for musicians, freelance writers, and more.

Those exempt from AB5 still must follow guidelines and adhere to the factors outlined in the Borello test, as this was the California standard before AB5.

Truckers in California anticipated an industry-wide sea change based on the January 1st AB5 implementation.  A change that would devastate its reliance on Owner Operators in California.  

Currently, the Trucking sector has a stay of execution.  The Federal District Court and the Superior Court of Los Angeles both sided with the California Trucking Association and Cal Cartage Transportation’s contention that Federal Aviation Administration Authorization Act (FAAAA) preempts California’s ability to impose AB5 on the trucking sector.

Implications

What happens if the Trucking Industry loses its current exempt status?  Arguments for and against the court’s temporary injunction will begin soon.  Possible ramifications would be litigation patterned after the Dynamex decision, expansion in workman’s compensation costs, compliance complications, and payroll increases.  These will affect large and small businesses alike.  But will be particularly painful to small businesses.

Predictably, California is on the progressive edge of a controversial issue, maintaining its decades-old aggressive stance on mainstream far-reaching regulations.  Sacramento enjoys a history of adopting policies years ahead of other states. AB5 is on a similar track.  Governor Cuomo, of New York, is pushing for a similar policy.   Others will certainly follow. 

Conversely, some states, with relaxed interpretations of worker qualifications anticipate California business owners fleeing the restrictive regulations and view AB5 as an opportunity to attract frustrated entrepreneurs and grow their economies. 

Now, the Department of Labor (DOL) under the Fair Labor and Standards Act (FLSA) is weighing in on the definition of an Independent contractor.  A recent period of comment was opened by the DOL in advance of a ruling on new guidelines.  

It is important to note that the DOL is not tasked with interpreting each state’s Labor Laws.  While the Feds may be trying to provide broad guidelines, it is up to the states to make decisions on how restrictive such laws like AB5 will be and to whom they will apply.  

Ultimately, business in California is not for the faint of heart.  It rewards those that are flexible and pay attention to detail.  It punishes those that cut corners and ignore the headwinds of regulation.  No matter where you do business in the United States, to survive and grow, be ready to adapt.  Because, what starts in California, usually rushes eastward.