New AB5 Law In California To Change The Way Employers Classify Their Workers and How Coronavirus Factors In
In autumn of 2019, the California AB-5 (Assembly Bill 5) law was passed, and it came into effect on January 1st, 2020. For companies based in California or doing business in California, this set off a cascade of changes regarding worker status and the steps companies have had to make to avoid misclassification.
In addition, there’s the chance that this law may be a precursor to other legislation on the subject down the line. However, at the same time that companies have begun to adapt to this law, there’s also another universal business change: adapting to the COVID-19 pandemic. As a result, any companies dealing with global hiring/HR managers should be watching how these two trends intertwine.
The Details on AB-5
Another law that was designed to have a similar impact to AB-5 was IR-35 in the U.K. While the coronavirus resulted in a delay of this implementation (originally April of 2020), it was primarily concerned with the UK employers’ staying compliant when hiring independent contractors, and making sure that workers classification is handled appropriately for income taxes. AB-5 has some similar focuses, but let’s take a closer look at the main details of the law.
AB-5 requires workers to be classified as proper employees unless they can prove they fall into three specific categories:
- A worker free from control/direction of the hirer related to work performance, both under contract and in fact.
- A worker doing jobs outside of the hiring entity’s normal business.
- A worker engaged in an independently established business/trade that’s the same as those involved in performed work.
If all three of these criteria aren’t met, the worker is classified as an employee, giving them full rights including employee benefits, employee protections, and other applicable items. Other states, like New Jersey and Massachusetts, also have their version of these laws on the books.
The first companies to see major consequences from this were app-based ones like Uber and Lyft, which hired independent contractors as the body of their workforce. These were some of the first companies to have trouble with the bill, as paying for all these benefits per the new law made their models go from cost-effective to troublesome. Depending on which side of the debate you are on, the ability to have off-payroll working rules was either a benefit or a major issue.
Many people who were truly independent contractors were worried they would lose all of their clients due to them no longer being able to afford them. This was a major reason why the bill had so many opponents at its inception, and still does today.
This is a smaller part of a greater debate that’s going on globally with regard to worker reclassification. This essentially entails the idea of treating contract workers as full-on employees. The main argument here is that it opens up the possibility for basic benefits, such as minimum wage and unemployment insurance. This bill and the ripple changes for employment law and labor codes have reshaped the “gig economy,” and have a lot of companies rethinking how they bring on professional support.
How Does Coronavirus Factor In?
In many ways, the coronavirus has created a sea of changes across the world of employment. You see businesses struggling with lack of clients, the shifts to a remote workforce, but in California, the debate over AB-5 has boiled hotter, with new arguments on both sides. Advocates for the law say that it’s important now more than ever that all workers have the ability to get healthcare coverage, sick leave, and other protections in a pandemic climate. Opposition for the law notes that the U.S. is already headed towards a recession, possibly a historic one, and there’s no reason for additional red tape taking valuable workers off the table.
With all this said, if businesses had to only consider compliant measures before in the past, today, it’s absolutely necessary. Different governments are providing temporary protections for gig workers, but that’s still a band-aid solution for the greater question of worker classification. When the dust settles from this pandemic, employers will ultimately be responsible for classifying workers correctly to avoid potential fines or lawsuits.
While AB5 may just be relevant to California in the U.S., it could serve as a bellwether for greater employment classification changes around the world. It’s always best for global companies with staff in several countries and multi-site projects to be ahead of the curve. This is where an international PEO and payroll solution company comes in, such as Acumen International. We take the time to learn about rapidly-changing in-country labor laws and regulations so you don’t have to keep track.
Always know that you’ll have HR and legal compliance with our help. No need to add on extra concerns while the business world grapples with the coronavirus.
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