In September 2019, Gov. Gavin Newsom signed new state legislation, Assembly Bill 5 (AB5), into law.  Effective January 1, 2020, AB5 affects independent contractors throughout California, radically changing 30 years of worker classification and reclassifying millions as employees. It significantly reforms 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.  AB5 takes this “ABC” Test and expands the use of this three-pronged test to cover the entire Labor Code and Unemployment Insurance Code.

“ABC” Test

Under the “ABC” Test, the presumption is that a worker is 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 Exemptions

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.

How Does AB5 Affect Independent Contractors?

AB5, and how to determine whether California workers are employees or independent contractors, continues to be a hot issue. In fact, worker misclassification suits have been steadily rising, and we expect to see this number continue to grow in the upcoming months. Not to mention, a new ballot initiative called Proposition 22, which sets out to undo AB5 for many drivers, will be showing up in the upcoming November general election. There has also been recent legislation significantly modifying AB5, entitled Assembly Bill 2257 (AB2257), which was signed into law on September 4, 2020. So in order to shed insight into how businesses can avoid potential litigation, we’ve put together quick guides on how AB5 affects different professions.

Conclusion

AB5 was primarily aimed at the gig economy, such as Uber and Lyft.  However, many other professionals will be affected.

AB5 has heavily impacted business owners and employers throughout California. Business owners must examine their California independent contractor relationships through the AB5 framework.  They 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.

We recommend companies engage legal counsel to assist with an independent contractor analysis and to craft independent contractor agreements that clearly demonstrate that the salesperson meets the applicable standards to avoid potential litigation.

If you need any assistance with an independent contractor analysis or crafting a legally compliant independent contractor agreement, contact Hackler Flynn & Associates.

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DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.

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