Many California business owners are watching the status of Assembly Bill 5 (AB 5) and its impact on small businesses. AB 5 took effect in February 2020, and could impact thousands of small businesses and self-employed workers. If you are unfamiliar with AB 5, here is an overview:

What is AB 5?

AB 5 is legislation designed to reclassify “gig workers.” Gig workers are those who are self-employed, who own startups or who own small businesses. Gig workers are classified as independent contractors.  Examples include companies like DoorDash, GrubHub, Uber and Lyft. The bill does not specify if other self-employed jobs will be included in changes under the legislation, such as freelance writers and truck drivers.

Under the new rules, independent contractors must meet an ABC test in order to maintain their status. Workers must meet the following requirements:

•         A – They must work independently
•         B – They must perform work that is different than what the business offers
•         C – They must offer their services to other businesses or directly to the public

Under this test, millions of workers in California will no longer qualify as independent contractors. There are thousands of workers who have cases in court to determine their status. Numerous companies are also appealing to the court, accountants and human resources officers to help them understand the rules and how they can avoid steep fines for misclassification.

How is AB 5 Affecting Small Businesses?

Under AB 5, many independent contractors, or gig workers, must be reclassified when they are hired. Under the new classification rules, they will be considered employees. The positive side of this is that, as employees, workers would have access to minimum wage, benefits and overtime pay. However, they lose the flexibility of setting their own hours and establishing their own work routines.

Small business owners in California are already reporting headaches, paperwork and issues with technicalities in the new rules. Some business owners are having to charge more for services in order to meet the costs associated with Medicare and Social Security taxes for employees. Costs they would not have had previously.