Morris Manning & Martin, LLP

Employee or Independent Contractor? New Worker Classification Bill Extends Employee Status in California

11.13.2019

On January 1, 2020, California’s new worker classification bill, Assembly Bill 5 (AB 5), will take effect, extending “employee” status and the protections that come with it to potentially thousands of workers. AB 5 changes the test for determining whether a worker is an employee or independent contractor and will make it harder for California businesses to classify their workers as independent contractors.

AB 5 codifies and significantly expands the 2018 California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 416 P.3d 1 (Cal. 2018). In Dynamex, the court adopted the restrictive ABC test for determining whether a worker is an employee or independent contractor for purposes of wage and benefit claims. Under the ABC test, workers are presumed to be employees unless the hiring business shows that:

  1. The worker operates anonymously and is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily and independently engaged in trade, occupation, or business of the same nature as that involved in the work performed.

Under Dynamex, the ABC test was limited to claims for violations of the obligations imposed by wage orders issued by the Industrial Welfare Commission (IWC). Under the new law, however, if the hiring business cannot meet all three prongs of the ABC test, the worker is considered an employee and is eligible for all the rights and protections enjoyed by employees under both the California Labor Code and the Unemployment Insurance Code, including minimum wage, workers’ compensation, unemployment insurance, paid sick leave, and paid family leave. Claims for such benefits and remedies can be pursued individually, or on behalf of a group or class of misclassified contractors.

While AB 5 expands Dynamex to cover more workplace protections, it expressly exempts workers in certain occupations from the ABC Test. These exempt occupations include: licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisors, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for “professional services” with another business entity. AB 5 also includes a list of additional exemptions that have their own factors which must be established in order for the ABC test to not apply.

However, even if a worker is exempt from the ABC Test under AB 5, the hiring business is not automatically safe from contractor classification scrutiny. The exempt business must still establish that the worker is a contractor, but in that case, the worker will be analyzed under the more flexible Borello test. The Borello test requires a consideration of several factors related to the amount of control an employer exerts over a worker, and no single factor alone is determinative.

In addition to the increased scrutiny on worker classifications, AB 5 also significantly increases the risk of non-compliance for businesses that engage workers as independent contractors in California. AB 5 goes beyond Dynamex by implementing aggressive new government enforcement mechanisms and imposing the more severe monetary penalties provided by the California Labor Code. Under AB 5, businesses will be exposed to the wide range of Labor Code remedies, such as the obligation to reimburse “employees” for their expenses and losses.

Companies operating in California that rely on independent contractors will likely have to re-evaluate their business models once AB 5 goes into effect in January 2020. In addition, because of how the law is written, its reach may extend to companies outside of California if those companies contract with independent contractors who work within California, even on a limited basis. Because AB 5 opens the door to misinterpretation, uncertainty, and future litigation with more severe penalties, companies that engage California workers should undertake a comprehensive review of their worker classifications and consult with legal counsel to assist in determining whether and how their particular business will be affected and to ensure compliance under the new law.