This blog was last updated on February 5, 2020

California’s Assembly Bill 5 (AB5) has sparked a national trend towards increased regulations on the gig economy. New York, New Jersey and Illinois have followed California’s lead, attempting to pass their own versions of AB5.

What is AB5?

Triggered by the landmark Dynamex ruling, California’s AB5 requires businesses that hire gig workers to treat those workers as employees rather than independent contractors. This includes increased worker protections, wages and benefits. The law went into effect in California on January 1, 2020. And California’s budget includes $20 million to uphold the law, including support for investigations of labor law violations and worker’s compensation claims. 

The impact on your business

Entrepreneur John Chuang believes New York’s legislation is needed to “address the ambiguity in New York labor laws when it comes to classifying W-2 employees and independent contractors.” 

California’s AB5 addressed this ambiguity with a three part “ABC test” to determine whether a worker is a W-2 employee or an independent contractor. The test determines a worker’s status on the following three points:

• (A) that the worker is free from the control and direction of the hirer 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 that involved in the work performed.

Using this ABC test, a California company can classify any worker who satisfies all three requirements as a contractor rather than an employee.

Any law enacted that is similar to AB5 will likely force your business to pay more in employer payroll taxes and provide more employee protections and benefits. This also means your business may need to file more W-2s and fewer 1099-Ks.