On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill No. 5 (AB 5) into law. The law provides clarification as to when California workers can by classified independent contractors rather than employees of the hiring company.
In the 2018 decision Dynamex Operations West. v. Superior Court,1 the California Supreme Court established the “ABC” test for determining whether a worker is an employee or independent contractor for the purposes of wage and hour claims (e.g. unpaid minimum wage, overtime, meal and rest periods, etc.). The Dynamex decision caused a stir among California employers because the ABC test makes it more difficult to classify workers as independent contractors. Since Dynamex was a ruling from the highest Court in California, businesses hoping for a change in the law would need to turn to the state legislature.
AB 5 is the Legislature’s response to Dynamex, and actually confirms that the ABC test is “the law of the land” when deciding whether an individual is an employee or contractor. AB 5 codifies2 the ABC test articulated in Dynamex by providing that a worker shall be classified as an independent contractor only if all three of the following factors are satisfied:
- (A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance for the work and in fact;
- (B)The worker performs work that is outside the usual course of the hiring entity’s business. (For example, a plumber hired by a retail company to repair a bathroom leak is an independent contractor; a cake decorator hired by a bakery to work on custom designed cakes on a regular basis is an employee); and
- (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Factors include whether the worker has taken steps to establish and promote an independent business through incorporation, licensure, advertisements, or routine offerings to provide services to potential customers.)
In practice, the ‘B’ and ‘C’ prongs make it very difficult for employers to classify workers as independent contractors because workers previously classified as contractors often perform work in the company’s usual course of business (e.g., drivers for transportation companies, as in Dynamex), and these workers rarely have their own established business. While employers may not have viewed workers who only work sporadically as “employees,” Dynamex and AB 5 require them to treat those workers as employees.
In enacting AB 5, the Legislature declared that “[T]he misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.” The Legislature also noted the concerns cited by the Supreme Court that misclassified workers lose significant workplace protections and employers who misclassify workers cause the state to lose revenue by avoiding payment of payroll taxes, workers’ compensation premium insurance, Social Security, unemployment and disability insurance.
However, AB 5 limits the effect of Dynamex to a certain extent because, when the law takes effect in January 2020, it will also establish that certain occupations are exempt from the ABC test. The occupations and professions that are exempt include doctors, lawyers, engineers, accountants, realtors, barbers, certain “professional service providers,” and others that meet the criteria of AB 5.
Workers in exempt occupations will remain governed by the “economic realities” test previously adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations.3 The Borello has a number of factors, but focuses on whether the person to whom service is rendered (i.e., the employer) has control or the right to control the worker both as to the work done and the manner and means in which it is performed.
Notably, many workers in occupations created by the “gig- economy,” such as rideshare drivers (Uber, Lyft) and delivery drivers (Doordash, Grubhub), are not exempt. Employers in these industries have long classified these workers as independent contractors, all but guaranteeing future legal battles.
The debate over Dynamex and AB 5 underscores the need for employers and workers to recognize their existing rights and obligations how they may change when AB 5 takes effect next year. Anyone who makes use of independent contractors or who works as an independent contractor should seek legal advice to ensure compliance with this ever-changing law.
1 (2018) 4 Cal. 5th 903, 912.
2 Labor Code § 2750.3(a)(1)(A), (B), and (C).
3 (1989) 48 Cal. 3d 341