California’s Strict Employee Classification Law: Coming Soon to a State Near You?

In September, California Governor Gavin Newsom signed AB 5 into law which introduced strict new rules for employee classification. Under the new law, workers will be considered employees—and not independent contractors—unless they meet three conditions (labeled the “ABC test“): 

  1. The person is free from the control and direction of the business, both under the contract and in fact.
  2. The person performs work that is outside the usual course of the business’s product or service offerings.
  3. The person is customarily engaged in an independently established business.

The new law has faced significant opposition from various lawmakers and businesses, including gig-economy companies such as Uber (which faces lawsuits under existing law too). AB 5 takes effect January 1, 2020.

Business Takeaway: With respect to legal developments, it is often said that “as goes California, so goes the country.” While this is a California law (i.e., not authoritative or binding outside California), it may be a sign of things to come. For example, companies with California operations may adapt their entire business models to be California-compliant for administrative reasons. How would transitioning contractors to employees affect your business?

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