With everything that’s been going on during 2020, it’s understandable if California business owners have somewhat forgotten about the controversial AB-5 employment law that redefines the relationship between California employers and consultants. Also known as the “gig-economy bill”, the AB-5 has been making splashes ever since it was first introduced back in 2018.
The debates around it have only increased from then on, especially after the bill was signed into law by California Governor Gavin Newsom in September 2019. But even in the face of all the staunch opposition from the business community, the law already came into effect on January 1, 2020 – and its effects are still to be fully understood. That’s because the effects of the law are far-reaching, surpassing its original purpose of regulating gig economy companies like Lyft and Uber.
So, AB-5 doesn’t just have those gig economy companies worried about its impact. Other fields are still trying to grapple with the law’s implementation and exemptions. Employees as varied as janitors, construction workers, yoga teachers, and medical technicians are still trying to make sense of it.
As you might already suspect, the software development industry and its engineers aren’t excused from the AB-5 reach. But how does it affect it, though? Given the broad approach of this particular law, it’s only natural for many California-based developers and IT companies to be confused about what it means for them. Let’s try to sort it out.
What is the AB-5?
The AB-5 law has a legal precedent in a 2004 case ruled by California’s Supreme Court. In it, a delivery driver sued Dynamex, the courier he worked for, after the delivery company forced its drivers to become independent contractors. The driver alleged that there were no grounds for such a change, as he continued to perform the same tasks he did when he was an employee.
Many companies commonly employed this tactic by which they classify their employees as independent contractors. By doing that, the companies cut labor-related costs while retaining the same benefits from their workforce. The Supreme Court agreed with the driver and designed a new way to make it harder for California companies to use this tactic.
The court established a new test that controlled which workers could be classified as independent contractors. So, for a worker to be relabeled as an independent contractor, they need to meet the following criteria:
- Be free of control and direction from the company
- Engage work outside the hiring company’s main business
- Has customarily engaged in the work they’ve been hired to do
If one of those isn’t met, then the worker is an employee, meaning that the company has to provide them with the benefits and perks that come with it.
Basically, the AB-5 law is the institutionalization of that test, which has been applied for years in California but that often ended up in court. The law’s goal, then, is to provide a legal framework that avoids that increased level of litigation while offering gig workers legal grounds to prevent them from falling victims to shady business tactics.
The AB-5 In Software Development
Without getting into whether the law’s intended goal can be achieved or not in practice, it’s best to understand how it could be applied in the IT industry, a sector whose workers would fail this test most of the time. How come? Because most IT consultants end up working for tech and IT companies, which means that they don’t meet the second point of the test. Thus, most IT workers would be reclassified as employees.
Does that mean that any tech company hiring IT professionals and software engineers in California would have to hire them as employees? It depends, really. First, the courts still have to interpret what it means for a worker to “engage work outside the hiring company’s main business”. But then, there also are a couple of exemptions that bring an extra layer of complexity.
The first one is that businesses with a state-issued license from AB-5 are exempted from this law. This isn’t particularly helpful for tech companies, as software engineers and IT professionals aren’t licensed and work under an industry-exemption to licensure.
The second exemption might be more interesting for tech companies, as it exempts businesses that hire legal entities such as sole proprietorships and LLCs. This means that independent consultants that have created their own legal entity could offer their consulting work free from the AB-5 application. There’s a caveat to this, though. Those entities have to meet certain conditions: 12 conditions, to be exact, which qualify the entity as a “Business Service Provider.”
The conditions (which you can review in full here) oblige BSPs to be independent from the hiring company, to have a business location, and to have proof of having worked in similar fields, among others. The list itself can provide the exemptions a California tech company needs to keep working with independent software developers and IT experts based on the state.
However, given the blurry nature of certain articles and details surrounding the law, it’s expected that some relationships between companies and independent software workers will eventually end up in court.
How to Avoid Problems With The AB-5 Law
Understanding the law to its full extent is a key step for any California company trying to hire independent workers, regardless of their industry. For those looking for software developers in particular, it’s extremely important to comprehend the exemptions and know how to articulate them. That’s especially true for tech companies that might don’t have enough clarity as to what the murky second point of the law’s test means.
Naturally, not all companies will have the time or resources to sit down and analyze the law in detail (let alone assess potential contractors on an individual basis). Under such circumstances, it feels like the safest bet for anyone looking for software development services is to hire a software outsourcing company.
By doing so, companies can rest assured that they are complying with all laws and regulations while accessing top engineering talent. What’s more – hiring outsourced developers can also lead to savings and added value as well as to other benefits. Thus, businesses can find the software engineers they need for digital acceleration processes without having to worry about potential legal ramifications.
Hopefully, this will shed some light on how the AB-5 might impact software development in California and how you can avoid potential problems until the full extent of the law becomes more clear.