With the passage of AB 5, California codified the 2018 California Supreme Court Dynamex decision, which established dramatically stricter criteria that a business needs to prove to maintain a worker as an independent contractor.

The first major change AB 5 brings is that it assumes workers are employees. A worker can only be classified as an independent contractor if the company can show that the worker meets all three prongs of the “ABC” test:

A. The worker is free from control and direction in the performance of their services; and
B. The worker is performing work outside the usual course of the business of the hiring company; and
C. The worker is customarily engaged in an independently established trade, occupation, or business.

Independent contractors who don’t meet all three prongs need to be reclassified as employees, meaning that they will be entitled to benefits — including minimum wage, overtime pay and paid leave. Employers will also have to contribute to unemployment and workers’ compensation insurance for these newly reclassified workers.

Boon for staffing. Based on how strict the test is, this law is likely to be a boon to staffing firms because one of the best ways companies can avoid the liability associated with AB 5 is simply to retain a staffing firm to provide the workers they need to fill the roles (often part-time or short-term) previously held by ICs, and ensure that the employees are paid in compliance with California’s many wage, hour and other labor laws. In fact, many businesses in California are already encouraging their ICs to contact a specific staffing firm with which they have a relationship. The likely increased costs associated with retaining temporary employees through a staffing firm are more than offset by avoiding the threat of a wage-and-hour class action lawsuit being brought on behalf of their independent contractors — which can be done without their consent, as only one putative employee is necessary to initiate litigation.

Potential cost. This boon carries a cost, however, because AB 5 is essentially taking tens of thousands of people who previously could not bring a wage-and-hour claim or employment lawsuit and giving them that right — in a state widely regarded as the most employee-friendly in the nation for litigation. Compounding that is joint-employer liability in California, meaning that if an employee is paid improperly or mistreated while on a temporary assignment, he or she can sue the staffing firm (the actual employer) and/or the company providing the temporary assignment. Because many of these workers will be doing the same job they had been doing as independent contractors, if they react negatively to increased supervision, bureaucracy and administrative hassle — and particularly when they realize that being an employee means they probably make less money after taxes — they may seek the solace of the Labor Commissioner’s Office, the Department of Fair Employment and Housing or an employment lawyer.

Beware your own ICs. Aside from retaining the services of a truly independent contractor to assist with their business (e.g., a plumber, website consultant or marketing expert), all of the individuals retained to send out on temporary assignments to clients need to be employees of the staffing firm. Even if your firm is placing primarily highly educated, high-rate temps, unless there is an exemption in AB 5 (which are mostly limited to licensed professionals such as physicians, lawyers and accountants, or direct-sales salespeople paid pursuant to a written commission agreement), the person must be an employee of the staffing firm, not an independent contractor working out of their home.

Staffing firms are, on balance, likely to benefit from AB 5 and should absolutely be marketing to their clients that their staffing firm can assimilate existing ICs working for the client and/or provide the client with substantial peace of mind in the face of the uncertainty and risk presented by AB 5. Staffing firms, however, should be careful in retaining any ICs themselves, and will want to do their due diligence before agreeing to indemnify any client at which they are placing temporary employees.