California Passes Law Limiting the Use of Independent Contractors

California businesses will now be limited in their use of independent contractors after Governor Gain Newsom signed a proposal into law. The new law is designed to limit worker misclassification, which Newsom said "erodes basic worker protections like the minimum wage, paid sick days, and health insurance benefits," the Los Angeles Time reports.

Under AB 5, which will take effect Jan. 1, Californians will be considered to be employees of a business unless an employer can show the work they perform meets a detailed set of criteria established by a California Supreme Court ruling last year. Under those criteria, a worker is an employee if his or her job forms part of a company’s core business, if the bosses direct the way the work is done or if the worker has not established an independent trade or business.

The ruling and new state law raise the bar for companies that otherwise might rely on freelance or contract work. California’s bill is arguably the strongest of its kind in the nation, giving the state and cities the right to file suit against companies over misclassification, overriding the arbitration agreements that many businesses use to shield themselves from worker complaints. The new law’s supporters point to audits conducted by state employment officials that found almost 500,000 workers were wrongly treated as independent contractors. Much of the early legislative debate on the bill centered on low-wage sectors of the California economy.

While the new law outlines detailed standards for who should be considered an independent contractor, the complexities of various industries are likely to present an enforcement challenge.