It is understandable that business owners in California may have overlooked the AB-5 employment law, which changes the dynamic between employers and contractors, due to the events of this year. Since its introduction in 2023, the Gig Economy Act (AB-5) has been a hot topic of discussion.
Since its signing into law by California Governor Gavin Newsom in September 2023, the measure has been hotly contested. Despite vocal opposition from the business sector, it came into effect on 1st January 2023, yet its full implications are still being evaluated. This is because the legislation has ramifications far beyond its intended purpose of regulating ridesharing apps, such as Uber and Lyft.
It is clear that AB-5 is a concern for businesses across many different industries, not just those in the gig economy. Professionals from a variety of backgrounds, such as housekeepers, builders, yoga instructors and medical staff, are still trying to understand how the legislation affects them.
It is clear that AB-5 has implications for the software development sector and engineers. The scope of this regulation has left many software developers and IT firms in California uncertain as to how it may affect them. Let us work together to identify a viable solution.
Explain the AB-5 to me.
Case law in support of AB-5 can be found in a 2004 ruling from the California Supreme Court. This case revolved around a former employee of the courier firm Dynamex who had brought a legal action against the company for the reclassification of their employees to independent contractors without their consent. The driver argued that there was no need for the change in their employment status as they were still performing the same duties as they had done previously as an employee.
The practice of treating workers as contractors is widely utilised by numerous businesses. Companies may be able to reduce costs on labour through this approach while still achieving successful outcomes from their staff. After listening to the driver’s argument, the Supreme Court formulated a unique solution to restrict the use of this tactic by California businesses.
The courts have established a new standard for determining whether or not a set of employees qualify as independent contractors. To be reclassified as a contractor, the following conditions must be met:
- Enjoy independence from the company’s oversight and management.
- Take on projects that aren’t directly related to the core competence of the employing firm
- Has Persistently Performed the Duties Assigned
If one of these conditions is not satisfied, the person is considered an employee, and the employer is obligated to give employee benefits.
The AB-5 statute codifies a test which has been utilised in California for a considerable period of time and has frequently been contested in court. Consequently, the purpose of the bill is to offer a legal framework which can restrict an increase in litigation, whilst providing gig workers with appropriate legal safeguards against any unjust corporate practices.
Software Engineering and the AB-5
It is critical to comprehend how the legislation may be applied within the IT industry, a sector in which most employees would not meet the requirements, prior to assessing whether the law’s stated purpose can be achieved in practice. What is the rationale for this? Given that the majority of IT professionals work for other IT firms, they cannot satisfy the second criterion. Consequently, most IT personnel would end up becoming full-time employees.
It is difficult to determine whether all California tech companies requiring IT workers or software engineers must employ them. The term “engage work outside the employing company’s principal business” is yet to be formally interpreted by the judiciary, and there are some exceptions that complicate the matter further.
AB-5 grants an exemption to companies that hold a valid state licence. Unfortunately, this does not benefit firms in the tech industry, such as software developers and IT specialists, as they are typically exempt from the requirement for a licence.
The second exception, which applies to organisations that contract with limited liability companies and sole traders, could be of particular interest to IT firms. This suggests that consultants who have established their own business can advertise their services without having to complete an AB-5 form. However, there are certain criteria that must be met in order to be considered a “Business Service Provider” (namely, twelve in total).
The terms, which are available in full here, state that Business Service Providers (BSPs) must not be affiliated with the hiring company, must have a physical premises, and must demonstrate prior experience in related industries. The list may also include any exceptions required by a Californian tech business to allow for the continued use of remote software developers and IT specialists based in the state.
It is likely that disputes will arise between businesses and freelance software developers due to the ambiguous nature of certain aspects of the legislation.
Solutions to Common AB-5 Issues
As a business based in California looking to recruit independent contractors, it is essential to be aware of the legal requirements and understand the exceptions. This is especially pertinent for technological enterprises that could be unfamiliar with the implications of the law’s second prong. It is important to ensure that these aspects are clearly communicated when recruiting software engineers.
It is not always feasible for businesses to thoroughly research the law or evaluate potential contractors individually. Therefore, engaging with a software outsourcing firm may be the most reliable solution for companies requiring software development services.
By outsourcing software development, businesses can access the most qualified engineers without any legal ramifications. Furthermore, there are financial and other benefits to be gained from utilising an external service to source developers. This allows companies to confidently search for the software developers they need to boost their digital operations without any concern for potential legal consequences.
Until the full implications of AB-5 become clear, this should provide an understanding of how it may affect software development in California and how to mitigate potential issues.
