The pay equity landscape in California will get more complicated for employers on account of Assembly Bill 5 (“AB 5”). AB 5 embeds the California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court into statutory law.

What Does AB 5 Do?

Starting in January 2020, AB 5 will require employers to treat independent contractors like employees unless they meet certain requirements known as the “ABC Test”. On its face, the ABC Test will make it much harder for companies in the gig economy to argue that their drivers, couriers, or other similar contract workers are not employees entitled to extra protections such as minimum wage and benefits for those eligible under the Affordable Care Act.

Here is the relevant statutory language that is set to make a significant impact on the California labor pool: “…a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.”

To put this language into context, let’s take the example of an Uber, Lyft, or other driver using an app to connect to customers. It will be very difficult for a ride-sharing company to make the case that its drivers are performing work outside the usual course of business, for example. This is why some of the largest ride-sharing companies have recently proposed a ballot initiative carve out allowing them to continue to treat drivers as independent contractors.

How Does AB 5 Relate Pay Equity?

From an equal pay perspective, reclassifying independent contractors as employees could create a number of issues for employers. You can think of any number of questions arising from ingesting former independent contractors into companies’ employee pay structures. Suppose a company takes into consideration tenure with the firm when determining pay for all employees. How would you determine pay for a driver who has used the app on an off-again on-again basis for four years but now wants to work full-time after the passage of AB 5? Employers will need to be very careful in documenting and justifying pay for former independent contractors who will be considered employees effective January 2020.

One tool recommended by individuals across the human capital, legal, and compliance industries is a comprehensive pay equity audit. A pay equity audit is a proactive approach to the evolving legal landscape designed to mitigate the risk of lawsuits, administrative investigations, and negative PR.

A report from Harvard Business Review Analytic Services found that mitigating risks of potential enforcement actions or lawsuits was one of the top reasons why employers undertake pay equity audits.

A pay equity audit can identify pay differences between employees that cannot be explained due to job-related factors. This type of audit not only identifies problems, but also provides actionable solutions. It gives employers an opportunity to ensure fairness in pay and prevent employee issues. It allows the employer to minimize risk by identifying and remediating deficiencies, providing the employer with greater standing to defend against and win claims of discrimination.

Overall, a comprehensive proactive pay equity audit is the best place to start to understand what your company is doing right, and where it can improve, before regulatory investigations and employee lawsuits require you to provide this information.

To read the Harvard Business Review Analytic Services report on pay equity audits, click here.

To learn more about achieving pay equity, click here.