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In January of 2020, California labor law AB-5 significantly altered independent contractor classifications, dramatically changing the landscape for businesses and any corporations utilizing gig-based workers. While big corporations like Uber, Lyft and DoorDash fight the new regulations in court, small and mid-sized businesses are adapting to new regulations with no small amount of difficulty.

What is AB-5?

AB-5 sets a new standard for independent contractor classifications. Many workers formerly classified as independent contractors now legally classify as employees and qualify for benefits, including minimum wage, overtime, workers’ compensation, unemployment and disability insurance. Additionally, companies must cover Medicare and Social Security. Providing these benefits costs employers significant money, meaning that businesses may have to raise prices or cut costs elsewhere to accommodate.

What is the new standard?

To remain classified as an independent contractor in California, workers must meet three classifications. The worker must:

  • Work independently, free from the control of the employer as they perform the work
  • Do work outside the scope of the normal operations of the business
  • Offer work to other corporations or to the public

The worker must meet all three qualifications, not just one or two. Certain industry exemptions apply, such as self-employed truckers, freelance writers and food-delivery drivers. However, these new classifications significantly alter the classification of many California workers.

What’s the impact?

While it is too early to gauge the effects of AB-5, the new labor law has upended workplaces and sparked lawsuits, social media campaigns for repeal and a multi-million-dollar ballot initiative.

As smaller businesses and corporations adapt and change strategies, the outcome of the larger lawsuits remains undetermined.