How many employees are on your company’s payroll? If you use temporary help or “gig” workers, that number may increase, thanks to a new California law. In fact, your employee count may even change for prior years, if the law is found to apply retroactively.

Assembly Bill 5, signed into law in September of 2019 and effective as of January 1, 2020, amends the state’s Labor Code and Unemployment Insurance code to sharply limit the practice of classifying workers as independent contractors rather than employees.

The legislation is expected to affect about a million California workers.

As a result of AB5, a singer who hires session musicians or backup dancers, a hospital that brings in a translator to assist a patient who speaks a foreign language, or a ride-hailing company with thousands of drivers, must treat these workers as employees. Even franchise owners with their own employees may find themselves classified as employees of the franchisor.

For an employer, AB5 requires paying these workers at least the minimum wage and overtime, providing meal and rest breaks, withholding income tax, making Social Security and Medicare payments, providing workers compensation and other insurance coverage, and much more. It also includes the prospect that these new employees could unionize.

For the state of California, employee status for these workers could mean $7 billion in additional tax revenue; independent contractors are sometimes less diligent about paying taxes than the law requires, especially when they are paid in cash.

There is no clear standard under federal law for determining if a worker is an independent contractor or an employee. Courts have weighed a number of factors, including how much control a company has over a worker and how central the work is to the company’s operations.

AB5, by contrast, imposes a clear “ABC” test. It says workers are employees if (A) they perform tasks under a company’s control, (B) their work is integral to the company’s business, and (C) they do not have independent businesses in that trade.

The legislature exempted dozens of professions from AB5: doctors, dentists, insurance and real estate agents, fine artists, commercial fishermen, hair stylists and barbers, and many others.

The law is remarkably detailed. Freelance writers, photographers and cartoonists are exempt as long as their work is carried by a publication 35 or fewer times per year. Psychologists are exempt, but marriage and family therapists are not.

Newspapers were given a one-year extension before they have to reclassify home delivery carriers as employees. The law empowers the state attorney general, city attorneys in large cities, local prosecutors and private attorneys to sue companies for alleged violations.

Ride hail companies Uber and Lyft, along with food delivery service DoorDash, have pledged a total of $90 million to fund a ballot measure that would create a special category of independent contractors for their drivers.

With all the attention on how AB5 will affect employers and workers after January 1, two other important issues have been almost overlooked: are the new rules retroactive, and is the new statute preempted by federal labor laws?

AB5 essentially codifies a 2018 California Supreme Court decision known as Dynamax. A subsequent California Court of Appeal ruling held that Dynamax applies retroactively because it did not set a new standard, but simply clarified the existing standards for independent contractor status. A federal court reached a similar conclusion.

The statute does not specifically address its retroactivity, but it does say the exemptions it provides apply retroactively.

However, California courts generally presume that legislation is effective prospectively unless the statute includes language saying that it apply retroactively, or the legislative history makes it clear that it was intended to apply this way. So it is likely that the courts will be asked to decide the issue of retroactivity.

Meanwhile, federal labor laws may preempt AB5 altogether.

Congress established the National Labor Relations Board (NLRB) in 1933 with the goal of establishing national labor policies that would supersede state or local laws. It enacted the National Labor Relations Act (NLRA) in 1935 to regulate labor practices and protect the rights of employees and employers.

A 1959 Supreme Court decision, Building Trades v Garmon, held that the supremacy clause of the Constitution bars states from regulating conduct governed by the NRLA.

The Supreme Court has also held that federal law “cannot be curtailed, circumvented or extended” by state law.

AB5 classifies some independent contractors as employees when federal rules do not, and it gives them the option to form unions when the NLRB has rejected that right for workers in very similar situations. So AB5 statute may be in direct conflict with federal law, which presumably would make it unenforceable.

California employers and independent contractors would be wise to stay informed about AB5 and how it may affect their businesses.

By Laurie Murphy