Gov. Gavin Newsom recently signed legislation, Assembly Bill 5 (AB5), into law which,
effective January 1, 2020, could potentially reclassify millions of independent
contractors as employees and significantly reform the future of independent workforces
in California.
AB5 codifies the landmark April 2018 decision in the Dynamex case (Dynamex
Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5 th 903). In the
Dynamex case, the California Supreme Court determined that the stringent, three-
pronged “ABC Test” must be used to determine worker classification in wage-order
claims. Further, AB5 expands the use of the three-pronged “ABC” test to cover the
entire Labor Code and Unemployment Insurance Code.
Under the ABC Test, a worker is presumed to be an employee. The burden is on the
employer to demonstrate the independent contractor status of the employee. To
successfully show an employee is an independent contractor, an employer must
demonstrate (via scrupulous documentation) that the worker satisfies all 3 criteria of the
“ABC” test. These include:
(a) the worker is free from control and direction in the performance of services; and
(b) the worker is performing work outside the usual course of the business of the hiring
company; and
(c) the worker is customarily engaged in an independently established trade,
occupation, or business.
AB5, however, has excluded numerous types of work from its reach. Among the
exceptions are licensed physicians, dentists, psychologists, veterinarians, lawyers,
architects, engineers, accountants, securities broker-dealers, investment advisers, real
estate licensees and private investigators; certain marketing and human resources
professionals; and licensed manicurists and barbers who can meet certain conditions,
including setting their own rates.
AB5 also exempts business-to-business contractors that meet 12 specific
requirements and referral agencies that meet 10 specific requirements. However, these
business-to-business contractor exemptions require a carefully planned strategy to
achieve compliance with all of the various requirements.
The independent contractor status of the types of work AB5 exempts from the ABC test
will be evaluated under a flexible 11-point “economic realities” test outlined by the
California Supreme Court in 1989 in S. G. Borello & Sons, Inc. v. Department of
Industrial Relations. Therefore, structuring and documenting the independent
contractor arrangement to comply with the multi-factor test is crucial for employers and
businesses.
AB5 was primarily aimed at the gig economy, such as Uber and Lyft. However, many
other professionals will be affected.
Although the full effect of AB5 will not be realized overnight, there is no doubt that AB5
will impact California and planning is a must. If you operate in California, it’s a good
idea to start preparing now. You must examine your California independent contractor
relationships through the AB5 framework. Employers must satisfy the Dynamex ABC
test (or the Borello multi-factor test if for an exempted occupation) or face increased risk
of defending against additional claims from individual workers claiming to be
employees, class action attorneys representing workers on a class or collective basis,
and city and state authorities.
