Gov. Gavin Newsom recently signed legislation, Assembly Bill 5 (AB5), into law. Effective January 1, 2020, AB5 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.5th 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, the presumption is a worker 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 physicians with licenses, 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.
If a worker is exempt under AB5, they must still be evaluated under the flexible 11-point “economic realities” test to determine if they are an independent contractor. This “economic realities” test is outlined by the California Supreme Court in the 1989 case of 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). Otherwise, employers face an 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.
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