California AB-5 Law Limits IT Independent Contractor Status

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  • California AB-5 Law Limits IT Independent Contractor Status

All types of IT people are fiercely independent. Under California AB-5, all the IT independent gigs – SEO, network services, developers, etc. – are now endangered. The IT workers must operate their own companies (corporation or LLC) or must become employees. Under AB-5, companies have a high burden of proving workers are indeed independent contractors. The new law has become a lightning rod for company and gig workers alike in all industries. For example, according to a labor lawyer Brad Nakase, under California AB5, strippers and exotic dancers are protected as employees and getting benefits they’ve always wanted. However, many companies are now refusing IT, gig workers, because of fear of violating AB-5. Many IT workers have applied to become employees in tech companies.

What is California AB-5?

California AB-5 is a labor law, commonly known as the “gig worker” bill, is a law that went into effect on January 1, 2020. In short, the law requires that all companies hire independent contractors to classify the workers as “employees” unless the company can pass the three-prong test. The three-prong test is known as the “ABC test,” which are:

A) The gig worker is free to perform services without the control or direction of the company.

B) The gig worker performs work tasks outside the usual course of the company’s business activities.

C) The gig worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

An example of prong A is: If the company tells the gig worker how and when to do his job, the company won’t pass the A prong test. The IT gig worker must be free from the company’s control and deliver the services on time.

An example of prong B is: if the company provides IT services and the gig worker provides IT services, then the company cannot pass the B prong. The company cannot offer the same function as the IT gig worker. So if the company sells hamburgers, and its Point of Sales broke down, the company may hire the IT gig worker. Ultimately, the lesson for prong B is that a company must never hire IT, gig workers, for regular business operations.

An example of prong C is: If the IT gig worker has his own company that is similar or same in nature as the company, then the company will pass the C prong. However, if the IT gig worker does not have his own company i.e., corporation, LLC, Inc., then the company will not pass the C prong.

AB5 was meant to protect workers from companies unlawfully classifying workers as independent contractors. However, for many IT gig workers, AB-5 has become a torpedo to their independence and working on their beach with just a laptop. Likewise, companies are increasing their prices to cover increase employer’s expenses such as social security taxes, unemployment taxes, worker’s compensation insurance, etc. for their reclassified gig workers as employees.

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