The California AB5 And Finances In 2020

In a previous article, Investing Port shared how the new IRS Withholding could affect finances in the new year. In this article, we would be looking at how the California AB5 could affect finances in 2020.

The California AB5 is one of the most critical changes for 2020 income earners and estimated to impact at least 1 million of the state’s 'gig' economy and freelance workers. The result is that this group of individuals would be reclassified from independent contractors to employees. The law that mandates this change (State Assembly Bill 5), passed by the state’s legislature in 2019 and is expected to take effect from Jan. 1, 2020 and is estimated to cover more than half of the state’s independent contractors. That law mandates employers to provide benefits such as paid sick leave, break time, minimum wage, and work injury compensation, as well as observe their right to unionize. 

The law, widely publicized for its debated application to Uber (UBER), Lyft (LYFT), and other ride-hailing drivers currently categorized as independent contractors, is expected to increase company cost by as much as 30%. 

 A report from the University of California determined that under the new law 64 to 91% of all California workers whose main employment comes from independent contract work will be covered by the law’s “ABC” three-part test and therefore may be required to be reclassified as employees.

Pete Isberg, vice president of government relations for ADP, told Yahoo Finance, “It’s going to be really difficult to have anybody help you in a practical respect without treating them as an employee, even if they're short term. For employers, a hire, just to help out during the holidays, or even for one day, you might not be able to do that going forward, which will make things more difficult for businesses.” 

The new law will also affect individual entrepreneurs who operate as a small businesses.

Isberg said, “Maybe a one-man shop, the tradesman that registers on an online platform and makes his services available, and people hire him through that platform, it’s going to be more difficult for that person to get jobs in California, for now.

Businesses affected by the law are not letting it go into effect without a fight. According to some reports, Uber, Lyft, and DoorDash have pooled $30 million each in a $90 million ballot initiative to fight the California AB5. With respect to the law’s ABC test, all individuals who provide labour or services in exchange for compensation, must be classified as employees, unless the employer can demonstrate that the individual’s work is:

• free from the control and direction of the hiring entity;

• outside the usual course of the hiring entity’s business; and

• customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If this new law finally plays out without any restrictions, it means the income of contracted workers will definitely increase in the coming year.