In Brief
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How The California AB5 Law Could Redefine Employer-Employee Relationships


Whether it is a first-time entrepreneur starting a trucking operation or an individual looking to supplement income, the independent-contractor model has empowered a fundamental change to the traditional 9-to-5 workday.

Some predictions suggest that half of the U.S. workforce will be freelancing over the next decade, either as a primary form of work or in conjunction with other employment. In the European Union, the number of freelancers grew close to 25 percent between 2008 and 2015 – and similar growth is seen across industries and worker demographics around the world.

While worker motivations in the independent-contractor model may vary (greater autonomy, flexibility or supplemental income) one thing is clear: regulations vary, too, and – in many instances – may not even exist.

A new California law will be first of its kind attempting to statutorily redefine the nature of employer-employee relationships, for both independent contractors and freelancers, while also considering the influence of the digital economy.

Assembly Bill 5 (AB5) takes effect January 1, 2020 and requires that many companies reclassify their relied-upon independent contractors as employees.

Defining workers as employees will entitle them to minimum wage, workers’ compensation, expense reimbursement and unemployment insurance, as well as benefits provided to other company employees, such as health insurance. Yet opponents of the bill argue that the mandated implementation plans of an otherwise well-conceived law will be messy, if not impossible, to carry out.

Efforts to reclassify contractors as employees likely won’t be limited to California or to ride-sharing companies. In fact, the impact will be felt across numerous industries throughout the U.S. and might even lead the way internationally. “For some industries, this is a seismic shift,” says Mark Epperson, executive director and Independent Contractor Program leader at Aon. “The current legislation is centered on California, but there’s already been talk about similar legislation elsewhere.”

The current legislation is centered on California, but there’s already been talk about similar legislation elsewhere.”
– Mark Epperson, executive director and Independent Contractor Program leader at Aon
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Among the industries that may be touched by such a change are ride-sharing businesses, trucking companies, food-delivery services, news publishers, cleaning companies, franchise businesses and software companies. Affected employers will feel the impact of reclassifying contractors as employees most dramatically in three areas: wages, benefits and injury protection (such as workers’ compensation).

The new law sets “employee” as the default category for workers. A three-part test, outlined in SEC. 2. Section 2750.3(1), will help identify exemptions; workers can remain independent contractors if they:

1. Are free from the control and direction of the hiring entity regarding how they perform the work, both by contract and in practice;
2. Perform work that is outside the usual course of the hiring entity’s business; and
3. Are customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

While most companies approve of the intent of AB5, such as to grant protections for workers injured on the job, there’s concern over the law’s execution. “Companies are saying, ‘We agree with the spirit of the law, but the letter of the law is almost impossible to implement,’” says Jillian Slyfield, Digital Economy Practice leader at Aon.

Companies are saying, ‘We agree with the spirit of the law, but the letter of the law is almost impossible to implement.’”
– Jillian Slyfield, Digital Economy Practice leader at Aon
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Impact On Wages

Reclassifying workers as employees has significant implications from a wage perspective, particularly minimum wage and overtime pay requirements. Minimum wage might seem straightforward, according to Slyfield, but for many companies it can become very complex, very quickly.

She continues with a real-life example: “If a ride-sharing driver has multiple companies’ apps open simultaneously and is potentially not even accepting rides, should any company be responsible to pay the minimum wage? If so, which one?”

Measures like California’s AB5 will also affect the availability of wage and hour insurance – a coverage for employers for the cost of defending and settling claims such as failure to pay overtime. “Some insurance markets are basically excluding independent contractors from wage and hour coverage in California,” says Thomas Hams, U.S. Employment Practices Liability leader at Aon.

“Take trucking companies, for example,” Hams continues. “Under a law like AB5, it’s challenging for underwriters to understand how a trucking company can say that independent contractors, who are truck drivers providing services to the trucking company, are performing ‘work that is outside the usual course of the hiring entity’s business.’”

Eligibility For Health Benefits

Under the new law, workers reclassified as employees would be eligible for company health insurance benefits. But some fear such measures could lead employers to demote some employees to part-time work to avoid health care coverage requirements under the Affordable Care Act.

According to Slyfield, many major companies that rely on contract workers have historically wanted to contribute to a benefits arrangement for their independent contractors. “Contributing to a health and benefits structure for their workers is welcome; however, it’s complicated because of how U.S. health insurance is structured. And in most cases, employers can only offer coverage to employees.”

Creating a middle-ground category between employee and contractor status might allow those companies to strike a balance on benefits, she says. “Perhaps a model could be built to contribute to health and benefits in the same way the worker contributes to the business, such as on a per-mile basis.”

Workers’ Compensation And Coverage For Occupational Injuries

Reclassifying workers as employees will also qualify them for workers’ compensation benefits. Every business is different, and for the insurers writing workers’ compensation insurance, the nature of new employees’ work will be significant.

“Workers’ compensation carriers are saying it’s a different risk to cover software engineers or salespeople compared to drivers,” says Slyfield. “Understanding various exposures and how they are different based on the roles covered alters underwriting rates as well as claims handling procedures. There is a real concern of the unknown for them.”

The Way Forward

Not surprisingly, efforts to limit the impact of California’s AB5 are underway. Several major digital economy companies have joined in a $90 million effort to promote a ballot initiative that would exempt them from the measure. There are also numerous efforts to amend the measure in the state’s legislature to either change it altogether or clarify elements of implementation.

However AB5 unfolds in the coming months across industries and geographies, additional work will be needed to understand the law in practice. From the ride-sharing company that relies on independent contractors to power their business model to the multinational organization that increasingly seeks freelancer support, “a clear path forward will be critical to both protect workers and enable businesses to move forward profitably,” says Slyfield.

Please note that this article is provided for informational purposes only and not for the purpose of providing legal advice.