AB 5: How the Law Affects the Construction Industry, and How It May Change

California’s AB 5 has only been active for less than two months, and the effects are spreading across multiple industries. Although construction has been relying on independent contractors for decades, the long reach of the law may make things more difficult for professionals working in the industry. A lot of people are also fighting to change the law, through amendments or an eventual repeal. Here’s an update on how this legislation is affecting construction, and how that might apply to your contracting business.

Meeting the ABC Test
The construction industry in California used to rely on other requirements to establish whether or not someone could be legally classified as an independent contractor. The ABC test implemented by AB 5 creates a new set of standards. Specifically:

  • Independent contractors must have free control over their own businesses, including the work that they might regularly do for another company.
  • They must also be established as a contractor or business owner in a formal way.
  • They must offer services that are different from that company‘s business model, and be able to sell those services to others.

If you are an independent contractor, it may not be very difficult to meet these requirements. But it depends heavily on the work that you do.

Exceptions for Subcontractors
The use of subcontractors is a major part of the way that AB 5 can affect the construction industry. Subcontracting is a very standard practice, where it would be less common in industries like retail, transportation or hospitality. If you regularly hire subcontractors, you can usually avoid worrying about this law if you make all of your actions related to subcontractors above board. You need to:

  • Make the contracts clear
  • Put expectations in writing
  • Distinguish your services from theirs

There are some fields in construction where this may prove to be a problem. For example, contractors who rely on subcontractors to provide daily services, or who request additional things on top of the work indicated in the contract, may need to separate these things. It’s normal to develop a working relationship that borders on friendship with your regular subcontractors. But you’ll need to make sure that it has a formal basis.

Worker Misclassification as a National Issue
While business owners in a lot of industries are worried about what AB 5 may mean for them, it’s important to keep in mind the spirit of the law as well as the details. The premise is that the state wanted to prevent businesses from treating people like employees without giving them access to benefits and other services like workers compensation or unemployment. This also changes tax liability that makes it harder to fund government systems.

Most independent contractors in construction shouldn’t have a problem proving that they’re not employees. But how it applies to you depends mostly on the way that you run your business. If you hire a lot of subcontractors, you’ll want to make sure that they can meet the subcontractor exception. If you are typically working as a subcontractor, it may be worth investigating how your typical work environment may apply to this law.

The Future of AB 5
It’s hard to tell what will happen with this law in the future. Since it became active in 2020, many lobbying groups in various industries have sought legislative support to amend it or scrap it altogether. At the same time, other states like New Jersey have considered similar legislation to fight worker misclassification. While the broad effects of AB 5 have made some states wary of enacting their own solutions to the problem, there’s also a possibility that it could become federal law, as well. As a contracting business owner, it will be your responsibility to make sure that you continue to meet these requirements in the work you choose to take, as well as what you offer.

Becoming an independent contractor offers you a lot of freedom to create your own career, as long as you can follow the current laws regulating it. To find the perfect career path for you, visit CSLS today!

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About CSLS

Contractors State License Service (CSLS) is the largest school in California devoted to the Construction professional. For over 23 years, CSLS has helped its students pass the exam to become licensed contractors in the State of California, licensing more students than any other school. From our main offices in Southern California, CSLS operates over 25 locations with full-service support and classrooms. We have grown to this extent by providing quality, professional services. In comparison, this provides 7 times the number of convenient locations than the second largest contractor school. Contractors State License Services is one of the only contractor schools in the state that is run by educators, not lawyers or people mostly interested in the bonding and insurance business. Contractors State License Services formerly operated under the oversight of the State of California's Bureau for Private Post Secondary and Vocational Education. As of January 1 2010, the new Bureau for Private Postsecondary Education (BPPE) came into existence replacing the BPPVE. CSLS now operates under the provisions of the California Private Postsecondary Education Act of 2009 (CPPEA), Article 4 Section 94874(f). Our Mission is simple; We can help you pass your California Contractors License Exam. Celebrating our 25th year, CSLS has helped over 120,000 students pass the California contractor licensing exam to become licensed contractors in the State of California. Additionally, we offer complete home study and online contractor’s license programs to help you pass your California contractors license exam. CSLS offers licensing classes for all types of contractor licenses, including General Engineering Contractor, General Building Contractor, Specialty Contractor, Insulation and Acoustical Contractor, Framing and Rough Carpentry Contractor, Cabinet, Millwork and Finish Carpentry Contractor, Concrete Contractor, Drywall Contractor, Electrical Contractor, Elevator Contractor, Landscaping Contractor, Warm-Air Heating, Ventilating and Air-Conditioning Contractor, and many others. For a complete list of contractor licenses, visit www.MakeMeAContractor.com and tuned for more informative posts.