If your company relies on a mix of full-time staff and freelancers, you’ve probably lost some sleep wondering if all your workers are properly classified. As anyone who’s run afoul of labor regulations already knows, mixing up your W2s and your 1099s can result in the kind of expensive compliance headaches no company needs.
Now, thanks to a wave of bills being introduced in state houses around the country, employee classification is poised to get a lot more complicated. Preparing yourself now could prevent loss of sleep later.
It all started in September 2019, when California passed a bill intended to protect gig economy workers by forcing companies like Uber and DoorDash to reclassify their freelance drivers as full-time employees. But the law—which has spawned copycat proposals in New York, New Jersey and Illinois—is having some unintended consequences, spurring some companies to swear off all freelancers in the affected states to avoid running afoul of the rules.
Here’s what you need to know about navigating these new regulations.
What is California AB-5?
California Assembly Bill 5 was designed to crack down on alleged employee misclassification by companies like Uber, Postmates and DoorDash, which rely on armies of independent contractors—or “gig economy workers”—to provide their most essential services. The law, which went into effect January 1, 2020, imposes a strict three-prong standard—known as The ABC Test— to determine which workers need to be classified as full-time employees. So far, Uber and Lyft have refused to comply with the law and are vowing to fight it in court.
But the new regulations don’t apply only to apps and tech companies. Any company that works with California freelancers may now have to reclassify those workers as FTEs and provide them with all the benefits required by California law, including a minimum wage, medical insurance, rest breaks and expense reimbursements. For companies that rely heavily on freelancers, that could mean millions of dollars in added costs. As a result, several large employers, including Vox Media and transcription service Rev, have simply stopped using California freelancers all together.
Labor activists applaud the new laws for protecting gig workers. But publishing companies, real-estate firms, beauty salons, transportation companies, construction firms and other business that regularly use independent contractors—to say nothing of the professional freelancers who want to keep their independence and flexibility—say the bills unfairly threaten their business model.
What is the ABC test and how do I stay compliant with it?
The ABC Test (also known as the 1-2-3 Test) is the heart of AB-5. It declares that workers must be classified as full-time employees unless they:
A. Perform their work free from the control and direction of the company
B. Perform work not directly related to the company’s main business
C. Maintain an established independent business performing the tasks the company is contracting them for
These standards are far stricter than those currently on the books in most states. Properly applied, the test severely reduces the number of workers who could qualify as independent contractors for many industries that regularly work with them.
Regardless of where your company is based, if you’re contracting with freelancers from California, these new rules apply to you, and you should be reconsidering your 1099 relationships in the context of these new regulations.
Which other states are being affected?
Similar legislation has been discussed to varying degrees in New Jersey, New York and Illinois.
New Jersey: In late 2019, a bill similar to AB-5 was proposed in the state legislature but never made it to the floor for a vote. However, the bill, known as S863, has once again been proposed for the 2020 legislative session, and Gov. Phil Murphy has signaled his desire to sign it.
New York: A bill similar to AB-5, Senate Bill S6699A, is currently in the Labor Committee. Another bill, A08343, seeks to create a third classification of employee known as a “dependent worker,” extending a handful of protections to people now classified as independent contractors. Both bills could be voted on later this year.
Illinois: No specific bill has been introduced yet, but several state politicians have expressed their desire to see one, touching off protests around the state.
Are there exemptions to the new regulations?
California’s law includes exemptions for a handful of jobs, including doctors, lawyers, real estate agents and commercial fisherman. There are also limited carve-outs for freelance writers, cosmetologists, graphic artists and a handful of other professions (You can see the full list of exempted and carved-out roles here.)
In New Jersey, the current bill allows exemptions only for insurance brokers, real estate agents and accountants.
The New York bill currently contains no exemptions, though several industry groups are fighting to have them included.
How do I track this issue to make sure my business stays compliant?
If your company uses California-based freelancers, reevaluate your relationships with those workers to make sure they are still properly classified based on the new regulations. To keep an eye on all other states, consider a third-party compliance service, like Sage HRMS, that sends you updates on regulations that affect your company.
Employee classification is a challenge for a business of any size. The good news is that these bills have become a major topic of conversation and news coverage, which means you would be unlikely to be caught unaware if it comes to a state that affects your business. Still, it’s best to be vigilant and watch the news for signs of progress. This is a controversial issue that will likely remain in the spotlight for years to come. The best any company can do is keep one eye open and never take compliance for granted.
The information contained herein is for general guidance purposes only. It should not be taken for, nor is it intended as, legal advice. We would like to stress that there is no substitute for customers making their own detailed investigations or seeking their own legal advice if they are unsure about the implications of freelancer laws on their businesses.
While we have made every effort to ensure that the information provided herein is correct and up to date, Sage makes no promises as to completeness or accuracy and the information is delivered on an “as is” basis without any warranties, express or implied. Sage will not accept any liability for errors or omissions and will not be liable for any damage (including, without limitation, damage for loss of business or loss of profits) arising in contract, tort or otherwise from the use of or reliance on this information or from any action or decisions taken as a result of using this information.
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