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Independent Contractors

How California’s Proposition 22 Changes AB-5 Independent Contractor Requirements

By December 11, 2020August 3rd, 2021No Comments
california flag representing proposition 22

In early November, California’s voters passed Proposition 22 by a 58% to 42% margin. Proposition 22 exempts employers in certain industries from California’s AB-5 legislation, which sets strict standards for independent contractor classification. Read on to find out what’s changed and what it all means for California employers who engage independent contractors.  

What Is AB-5? 

California’s AB-5 law went into effect on January 1, 2020. The law formlized the “ABC Test,” which outlines three criteria employers must meet to compliantly classify their talent as independent contractors rather than employees

California drafted AB-5 legislation to protect gig workers like Lyft and Uber drivers. Because employers do not have to provide independent contractors with benefits like insurance, worker’s compensation, and paid leave, many companies decrease overhead by classifying their talent as independent contractors rather than employees. AB-5 tightened the definition of independent contractors, essentially forcing more companies to classify their talent as employees—and provide them the accompanying benefits. 

Under AB-5, employers must classify their talent as an employee unless they meet the following three conditions of the ABC test:

  • The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

In other words, independent contractors must perform specialty work that is beyond a company’s usual focus, and must also regularly perform similar work for other employers. 

While lawmakers created AB-5 largely to protect drivers for rideshare companies, it also created repercussions for professionals in other sectors. Thanks to the new restrictions, many employers could no longer hire independent contractors for positions in writing, music, taxes, education, healthcare, and more. The disruption led to an outcry from both employers and talent that had traditionally worked as independent contractors. 

Proposition 22 Eases the Definition of Freelancers

California voters passed Proposition 22 in response to AB-5, creating exemptions for some companies that classify talent as independent contractors—but not others. 

Proposition 22 allows app-based rideshare and delivery companies to classify workers as independent contractors even if they do not meet the three standards of the ABC test. Uber, Lyft, DoorDash, Instacart, and Postmates raised more than $200 million to lobby for the proposition. 

Essentially, Proposition 22 means rideshare and delivery companies are no longer responsible for providing their drivers with the worker’s compensation, unemployment, and other benefits they are required to offer to employees. 

Proposition 22 does provide some benefits to these app-based workers, including: 

  • A minimum wage for drivers that is no less than 120% of the applicable minimum wage while driving
  • no deduction of any portion of the tips that drivers earn 
  • A health care stipend that will vary based on the time workers spend driving
  • Reimbursement of vehicle costs
  • Insurance coverage for occupational injuries

The new law also brings:

  • Discrimination protections for drivers and passengers
  • Background check requirements for drivers
  • Driver safety training
  • Required driver rest periods

Considering these benefits, Proposition 22 creates a new class of workers that resemble employees but are exempt from employment classification and the corresponding benefits. Proposition 22, however, only exempts companies in a few sectors from AB-5’s ABC Test. Companies that wish to engage independent contractors must closely review AB-5 and Proposition 22 criteria to ensure they are compliantly classifying their talent.  

How an Expert Classification Partner Protects Your Company

Turning to an expert ensures that companies correctly classify their talent—and avoid the fines, legal fees, reputational damage, and lost business opportunities that come with misclassification

Velocity Global’s Independent Contractor Classification solution, for example, helps companies quickly and accurately assess their talent without having to wade through local labor laws, whether in California or across the globe. The process is simple:

  • Start by filling out Velocity Global’s quick and simple contractor evaluation assessment. 
  • Our experts check your assessment against the specific regulations of whichever market in which you are operating, then advise whether you can compliantly classify your talent as an independent contractor. 
  • Velocity Global offers additional services that make it easy to onboard, pay, and manage your independent contractors. 
  • If your talent needs to be classified as a supported employee, our experts can also take care of everything you need to compliantly engage and support your teams. 

By focusing on everything from background checks and statements of work to invoice processing and benefits administration, we allow your teams to focus on their core responsibilities—so you get the workforce flexibility you need without taking on new burdens. 

Accurately Classify Your Talent in California and Beyond

Velocity Global’s experts have helped hundreds of companies compliantly build independent contractor teams in all 50 U.S. states and over 185 countries worldwide. Reach out today to find out how we can ensure your workforce avoids misclassification risks, no matter where you are.