Recently on September 18’ 2019, the California governor Gavin Newsom signed the gig-worker law AB5. This law aims to reclassify millions of independent contractors as employers, which has shaken many employers and companies across the state of California. This new law will primarily affect giants in the industry like Uber and Lyft. It drastically impacts the models that operate with gig workers, where the contracted stakeholders own the factors of production. The California gig economies are accused of exploiting labor, labeling them as independent contractors in hopes to attain cheaper factors of production as well as lower costs. Many companies flatly reject the assertion of this bill, and this raises the main point of contention. Companies do not agree with the exploitation angle and are against the bill pushing their costs unreasonably high. This bill can drive small businesses out of the market and force companies to downsize, impacting employment.

How Will the AB5 Be Enforced, and Who is Exempted?

This law takes effect in January in California; however, it is also said that the way the law is written it may extend to companies outside of California. Especially firms that are owned and run outside of California but have their operations within the state as well. The law will start to take action on the 1st of January 2020. However, the bill further elaborates how a worker can only be classified as a contractor if they fulfill the following conditions:
1) If the worker is free from the control of the owning company
2) If the worker does work outside the circle of the usual course of business
3) If the worker is a part of a trade, business, or occupation that is independently established.

Many other professions are also exempted from the AB5 ruling, and this is mostly because these professions involve price negotiation with their clients. These professions include Accountants, Commercial fishers, Dentists, Doctors, Direct Sellers, Engineers, Graphic designer, Hairstylists, Insurance Agents, Lawyers, Psychologists, Real Estate agents, Stockbrokers, and Travel agents.

How Will California Gig-Economies Will Respond

Many companies operate on the gig-model in California alone, and the AB5 ruling is expected to impact over 1 million workers. What affects California is what also sets a precedent for the rest of the country. This AB5 ruling also illustrates the Dynamex ruling made by the California Supreme court. The Dynamex ruling also makes use of the ABC test to determine employment status. This bill is to affect bigger corporations like Uber, Lyft, many food hailing services, franchise owners, and custodians. Many of these models will have to bear the burden of higher costs as their independent contractors will now be classified as employees. More importantly, this will also affect the insurance sector. Many bigger insurance companies benefit from workers with low benefits and coverage for healthcare. Now independent contractors are entitled to worker’s compensation. Many aspects of the will significantly increase costs for these companies, includes increasing their payrolls, giving safety training, and an increase in insurance premiums.

Impact on Insurance and Benefits

One of the primary reasons costs will rise is due to the employment practices liability insurance (EPLI). The insurance premium will depend on such factors as:

  • Type of business
  • Number of employees
  • Legal history (i.e., Have you been sued in the past?)
  • Other various risk factors

Now companies cannot avoid paying for unemployment benefits, minimum wage, overtime wages, and, most importantly, healthcare. With all this added, it can raise costs anywhere around 26 to 30% for most gig-economies.
The worrisome part is that it may drive out many budding businesses and earn losses for mid-sized companies. Many employers will have to look for independent insurance providers to know the kind of coverage needed.

January Update:

A federal judge has handed down a temporary restraining order blocking the January 1st implementation of California’s AB5 against motor carriers. In a case brought by the California Trucking Association, Judge Roger T. Benitez of the U.S. Southern District Court ordered the state not to enforce AB5 against any motor carrier in California, pending a final resolution of the lawsuit brought by the California Trucking Association.


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