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 certain 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 multi-factor test outlined by the California Supreme Court in the 1989 case of S. G. Borello & Sons, Inc. v. Department of Industrial Relations. The Borello test relies upon multiple factors, including whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed. No one factor of the multi-factor test is dispositive. 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. 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.

What to Know About Prop 22

Although AB5 was primarily aimed at the gig economy, such as Uber and Lyft, a ballot called Proposition 22 undid AB5 for many app-based drivers. Proposed and approved during the November elections, Proposition 22 reclassified many drivers and gig workers as independent contractors. The main point of Proposition 22 was to protect app-based drivers with benefits of minimum wage, mileage compensation, and work hour caps; however, many workers have not acquired the benefits promised by this initiative. After countless lawsuits brought forth by drivers in the ride-share industry, an Alameda County Superior Court Judge ruled Proposition 22 to be unconstitutional in August 2021 and that the measure as a whole was unenforceable. The ruling has been appealed and Proposition 22 remains in effect until the litigation is concluded.

Conclusion

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, if appropriate, craft independent contractor agreements that clearly demonstrate that their workers meet 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.

See Our Video On This Topic

Watch Video

Do you have independent contractors?

Fill out our form to download our guide to AB5 Compliance.

Guide to AB5 Compliance

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.

Your html code will go here