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Tom Neff, CPA , Tax Stockholder,  International Tax Chair and Chairman of the Board in Oakland.
Tom NeffCPA / Tax Partner / International Tax Co-Chair / Managing Partnerview bio

AB5 Makes it More Difficult to Classify Workers as "Independent Contractors"

Man on curb hailing a taxi. Classifying workers as independent contractors.

RINA Alert --  October 23, 2019 | Volume 17, Issue 1 | 800.756.2772


Recent legislation is going to make it more difficult for employers to classify workers as independent contractors. On September 18, 2019, Gavin Newsom signed into law AB5, which will transform a large proportion of independent contract workers (such as delivery and transportation drivers) into employees, based on new criteria for classification. This law follows the “ABC Test” established by the California Supreme Court in the 2018 Dynamex case. Some workers will be exempt from the law - including insurance brokers, doctors, dentists, lawyers, architects, engineers, accountants and real estate agents. Under the ABC Test, a worker may only be classified as an independent contractor if:
 
(a) the worker is free from control and direction of the hiring entity in connection with the performance of services; and 
(b) the worker is performing work outside the usual course of the business of the hiring company; and
(c) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Currently, workers classified as contractors do not receive minimum wage, overtime pay, sick leave, family leave, unemployment and disability insurance, workers’ compensation and protection against discrimination and sexual harassment. California state officials estimate that the state loses $7 billion a year in payroll taxes due to misclassification.

The Gig Economy is fighting back. Lyft and Uber have said that they will spend $60 million to fund a ballot initiative in 2020 to ask voters to approve the creation of a new category for ride-hail drivers. Although lobbyists have convinced lawmakers in more than two dozen states to pass laws that classify drivers as contractors, experts say that these companies will face an uphill battle in California as they struggle to become profitable.

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