How AB 5 Could Impact the Construction Industry

The commercial real estate market, in many ways, dodged AB 5, a new California State law the substantially restricts the use of subcontractors. In addition to real estate brokers, the construction industry is exempt under the new law. With already steep construction costs, the exemption was a relief to the industry.

“It is possible that AB 5 may have less of an impact on the construction industry than other industries such as the gig economy because the law specifically exempts traditional construction subcontractor relationships from its reach,” Dwayne McKenzie of Cox, Castle & Nicholson, tells GlobeSt.com. “AB 5 states that the ABC test of the Dynamex decision does not apply to the relationship between a contractor and an individual who is performing work under a subcontract, so long as a number of specific requirements are all satisfied, including that the subcontract is in writing, that the subcontractor is licensed by the Contractors State License Board and that the work is within the scope of such license. The law also recognizes that other professionals in the construction industry, including architects, engineers, and lawyers, are exempt from the three-factor test.”

However, it might be too early to breath easy. Trucking is more complicated, and for owner-operator trucks, the law could have an impact. “Treatment of owner-operators of trucks and other equipment is a significant issue, since they do not fit within the subcontractor exemption,” says McKenzie. “Although an additional exemption for “construction trucking services” was included in AB 5, it essentially prevents the use of brokers, which will create significant issues for contractors seeking to use owner-operators.”

In addition, the construction trucking exemption has a time limit. “The construction trucking services exemption currently is set to expire in two years, so that all of the efforts being made to adjust to AB 5 and this exemption may not work long-term, leaving the industry to have to adapt again in the near future,” says McKenzie.

Whether of not this will put more pressure on construction prices is still to be seen. “Time will tell whether the law will have a significant, long-term effects on construction and development costs,” says McKenzie. “But uncertainty over the costs of AB 5, and particularly the potential liability issues surrounding use of owner-operators, could lead to increased bid pricing by contractors, particularly near-term.”

Ancillary costs from the law could also put pressure on pricing. “Even though the law exempts traditional subcontracting relationships in the construction industry, companies must still spend time and resources on legal or compliance-related work, for example, to research and confirm application of exemptions to the law, or to answer workers’ questions about its applicability,” says McKenzie. “Until contractors and subcontractors have more certainty about the impact of AB 5 on their costs, the risk for increases in construction costs will remain.”