This year has been tumultuous, and as a result, business owners in California may have missed the implementation of the AB-5 employment law, which alters the relationship between employers and contractors. The Gig Economy Act, or AB-5, generated much buzz since it was first brought into effect in 2023.
When California Governor Gavin Newsom signed it into law in September 2023, the AB-5 measure sparked widespread debate. Despite resistance from the business community, it officially took effect on 1st January 2023. Its complete impact is still under assessment because the legislation affects far more than just ride-hailing apps, like Uber and Lyft, which it was designed to regulate.
The AB-5 law is a significant worry for businesses in numerous fields, not just the gig economy. Professionals from various occupations, including housekeepers, builders, yoga instructors and medical personnel, are still grappling with comprehending the impact the law will have on them.
The impact of AB-5 stretches beyond the gig economy and affects the software development industry and engineers as well. Many software developers and IT firms in California find themselves uncertain about how the law might affect them. Let us collaborate to find a feasible resolution.
Please provide an explanation of what AB-5 is.
The legality of AB-5 is supported by a 2004 decision by the California Supreme Court, which involved Dynamex – a courier company. The plaintiff, a former employee of the company, filed a lawsuit against them for their decision to reclassify their employees as independent contractors without their consent. The driver contended that there was no cause for the change in their employment status as they were essentially performing the same responsibilities they had before when they were employees.
Many businesses often resort to the practice of classifying employees as contractors to save on labour costs while still benefiting from their services. The California Supreme Court, prompted by the driver’s testimony, devised a distinct resolution to limit the use of this strategy by companies in the state.
There is a new criterion for determining if a group of employees are eligible to be classified as independent contractors. The courts have stipulated the following must be fulfilled in order to be categorised as a contractor:
- Have autonomy from the company’s supervision and control.
- Undertake tasks that are not directly linked to the primary expertise of the employer.
- Demonstrates consistent execution of the assigned responsibilities.
If any of these requirements are not met, the individual is classified as an employee, and the employer is responsible for providing employee benefits.
The AB-5 law formalises a test that has been in operation in California for a significant period and has often been disputed in court. The bill aims to establish a legal structure that can curtail the rise in litigation while also providing gig workers with adequate legal protection against any discriminatory business practices.
AB-5 and its Impact on Software Engineering
To determine whether the legislation’s intended objectives can be accomplished in practice, it is crucial to understand how it may be implemented in the IT sector, where the majority of staff are unlikely to meet the requirements. Why is this? Because most IT professionals work for other IT companies, they are unable to fulfill the second criterion. As a result, a large number of IT employees would be converted to full-time staff.
It is unclear whether all California tech companies in need of IT personnel or software engineers are required to hire them as employees. The courts have yet to provide a formal interpretation of the phrase “outside the employer’s primary business,” and there are some exemptions that further complicate the situation.
AB-5 provides an exception for companies possessing a valid state licence. However, this does not offer any relief to businesses in the technology sector, such as software developers and IT professionals, as they are often exempt from licence requirements.
The second exemption, which pertains to firms contracting with limited liability firms and sole proprietors, may be particularly relevant to IT businesses. This indicates that independent consultants who have established their own company may advertise their offerings without having to fill out an AB-5 form. However, to qualify as a “Business Service Provider” (there are twelve of them in total) that meets the criteria, certain conditions must be met.
The criteria, which can be read in full here, specify that Business Service Providers (BSPs) must not have any affiliation with the hiring company, must maintain a physical location, and must demonstrate prior expertise in related fields. The list may also include any exemptions necessitated by a California-based tech company to enable the continued employment of remote software developers and IT specialists within the state.
The ambiguity of some aspects of the legislation may result in conflicts between companies and freelance software developers.
Resolving Common Problems Arising from AB-5
For companies based in California seeking to hire independent contractors, it is crucial to be informed about the legal obligations and be familiar with the exemptions. This is particularly relevant for technology businesses that may be unaware of the implications of the law’s second criterion. When recruiting software engineers, it is essential to ensure that these aspects are communicated effectively.
Conducting comprehensive legal research or thoroughly evaluating each potential contractor may not always be practical or cost-effective for companies. Therefore, engaging with a software outsourcing company may be the most dependable option for businesses in need of software development services.
Through outsourcing software development, businesses can hire the most skilled engineers without encountering legal issues. Additionally, there are financial and other benefits to sourcing developers through an external service. This enables companies to confidently search for the software developers they require to enhance their online operations without any apprehension about potential legal repercussions.
Until the complete consequences of AB-5 are ascertained, this should provide insight into how it may impact software development in California and how to minimize any potential difficulties.
