California Budget Includes Funding for Enforcement of AB-5
An anticipated revenue shortfall of $54 billion has not stopped the California state legislature from agreeing on June 24th to allocate $17.5 million in the new budget toward efforts to enforce AB-5 over the next fiscal year. The amount is slightly lower than the $20 million that had been earmarked in May.
The funds will be directed to the Department of Industrial Relations to provide for the creation of over 100 positions in the next year, and additional funding has been set for the next two fiscal years as well. The singular focus of these new positions will be to ensure compliance with AB-5. For CA employers that have been utilizing 1099 workers, this means to expect significantly increased audit activity, which could lead to prosecutions and penalties.
Early indications are that at least a quarter of the new positions will be allocated to the Division of Labor Standards Enforcement which will be following up on and investigating reported violations, with a particular focus on adjudicating and managing workers’ compensation claims, which are expected to continue to rise given the likelihood of a finding that workers are actually employees entitled to on-the-job injury protection and coverage. The efforts therefore will primarily focus on conducting audits, carrying out prosecutions, and charging penalties on employers. Whether or not the new investigative group will have access to PUA data from independent contractors that filed UI claims during the pandemic remains to be seen.
Employers must be on high alert to carefully evaluate any and all 1099 arrangements. Specifically:
- Review all Independent Contractor Agreements and be aware of both state and federal restrictions. While CA may be leading the field, many other states have been enacting laws to discourage misclassification, particularly in highly-regulated industries such as transportation and delivery.
- Recognize that there is zero significance given to what either or both parties would prefer the work arrangements to be. It is wholly determined by state and federal regulatory agencies.
- Be 100% familiar with AB-5 and the ABC test. This is the prevailing guidance in CA and, as always, not being aware of it will not serve as a defense. The full details on the law and the ABC test can be found here on the DIR website: https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
The heat is being turned up on other fronts as well. As the budget funds were being finalized on Wednesday, CA Attorney General Xavier Becera announced that he will be joining with the City Attorneys of Los Angeles, San Francisco and San Diego to file a preliminary injunction seeking to immediately force companies like Lyft, Uber and DoorDash to reclassify their drivers as employees.
If there is any silver lining right now for employers potentially impacted by these actions, it appears that it will have to come at the ballot box in November, as an initiative has qualified that would provide additional exemptions to AB-5.
It should also be noted that, in a recent survey of nearly 800 business leaders conducted by Employers Group and the Los Angeles County Business Federation, only 4% of respondents felt that the state should not research new options to make AB-5 more flexible in order to better support the reopening of businesses following the shut downs.
The battle lines seem to be shaping up, and we can expect this to continue to be one of the top employment issues for a while still. Stay tuned!