New California Law Roils IC Classification – 64% Of ICs Now Considered Employees

New California Law Roils IC Classification – 64% Of ICs Now Considered Employees

Published November 21, 2019

A few bad apples spoil the bunch as they say. With Federal/IRS rules governing independent contractor classification being open to broad interpretation, states are enacting laws on their own, intended to protect labor from bad actors at the corporate level. A recent state-level law is forcing employers nationwide to pay closer attention to IC utilization and classification.

California, long home to strong regulation protecting labor, has passed California Assembly Bill 5 (AB5) which codifies a recent California State Supreme Court ruling. Known as the Dynamex case this ruling established a new legal standard, called the “ABC test,” for determining if a worker should legally be classified an independent contractor. Similar to the IRS test, the ABC test requires that an organization can only hire an independent contractor if the work performed, is a) under the worker’s control and not that of the business, b) is not part of the company’s core business, and c) is part of the worker’s independent profession.

The California Assembly’s new law is seen as a response to widespread abuse of IC classification by businesses seeking to minimize their labor costs by stretching the bounds of what could credibly be considered actual independent contract activity. The new law will, by some reports, instantly return 64% of those workers currently classified as ICs to employee status. For those being improperly deprived of benefits like minimum wage, worker’s comp, unemployment and company-sponsored healthcare, this new law is a welcome respite. However, for many with legitimate claims to IC status, it is not such a warm and welcome development.

Heightening the profile of this story (and complicating the rule making) is the role of on-demand labor platforms like Uber and Lyft in the “rideshare” space, which have significant money to spend working against this legislation and others like it. While Uber and Lyft workers in CA account for less than 10% of all IC workers in state, these two businesses plan to spend nearly $100 million to pursue a ballot initiative protecting their business models which they have claimed in federal court and the media, are legitimate in their classification of drivers as ICs.

The powerful California Truckers Association also plans a lawsuit to contest AB5. Shawn Yadon, the Association’s CEO released a statement saying in part, “Independent truckers are typically experienced drivers who have previously worked as employees and have, by choice, struck out on their own. We should not deprive them of that choice.” Yadon suggests the legislation may be in violation of existing federal law. He claims AB5 will deprive more than 70,000 independent truckers of their ability to work and will force many to abandon $150,000 investments they’ve made into clean truck technology as owner/operators.

Further complicating things, another 9% of current CA ICs is comprised of mostly high-wage jobs including doctors and dentists, lawyers, accountants and real estate agents are exempted under AB5. This is because these are the types of “independent professions” referenced in part “C” of the new ABC test. So, some advocates for more permissive IC classification laws point to the extent to which AB5 will impact on lower income laborers and deprive them of the flexibility and tax benefits of IC status.

Where all this ends up, with new legislation being tested by litigation and put before voters on ballot initiatives, is anybody’s guess. What does it mean for an organization operating in California? The answer to that question is very much in flux. For organizations leveraging IC resources as part of their workforce strategy in California or anywhere in the world, the best bet is to engage the guidance of a provider like People2.0. It is our mission to keep our industry experts focused on the latest developments and to perform rigorous legal and operational reviews so that we can deliver up-to-date guidance to customers as they navigate this rapidly evolving segment of workforce planning.

Contact us today to learn more.