California Assembly Bill 5: Worker Status–Employee vs. Independent Contractor

California Assembly Bill 5: Worker Status—Employee v. Independent Contractor

On September 18, 2019, California’s Governor Gavin Newsom signed Assembly Bill 5 (AB 5) codifying a California Supreme Court decision that made classifying workers as independent contractors, versus employees, more difficult.  In Dynamex Operations West, Inc. v Superior (Dynamex), [i] the Court adopted a 3-part test for determining whether a worker is entitled to wage and hour protections under the state’s Industrial Welfare Commission’s Wage Orders, displacing the common-law, multi-factor test it had adopted 30 years ago in a case called S.G. Borello & Sons, Inc. v. Department of Industrial Relations (“Borello”).[ii]

AB 5 extends the ABC test beyond just the Wage Orders to the Labor Code and the Unemployment Insurance Code, which cover paid sick leave, workers’ compensation, and state-administered benefits such as unemployment insurance, state disability and paid family leave benefits.

AB 5 exempts specified occupations from the application of the ABC test, but notably does not specifically mention gig workers, and whether AB 5 will be interpreted by the courts to cover Lyft and Uber drivers and other gig workers will likely be determined by the courts and/or California voters.

ABC Test

Under the ABC test, an individual providing services for remuneration is presumed to be an employee, unless ALL three of the following conditions are met:

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

Exceptions

AB 5 defines exceptions for various occupations and relationships.  If an exception applies, the bill then specifies what standard, other than the ABC test, will govern.  For the most of the exceptions, the bill provides “the determination of employee or independent contractor status … shall be governed by Borello.”  Thus, to properly classify a worker as an independent contractor, it is not enough that a particular situation falls within one of AB 5’s exceptions.  The relationship must still satisfy the applicable test, which will usually be the Borello test.  Likewise, if a court rules that the ABC test cannot be applied in a particular context, then Borello will apply.

Exempt Occupations

The following occupations are exempt from the ABC test, and remain subject to the Borello test:

  • a person or organization licensed by the Department of Insurance
  • a physician, surgeon, dentist, podiatrist, psychologist or veterinarian licensed by the State, performing professional or medical services to or by a health care entity
  • a licensed, practicing lawyer, architect, engineer, private investigator or accountant
  • a securities broker-dealer or investment advisor (or their agents or representatives) who are properly registered or licensed
  • certain direct sales salespersons
  • certain commercial fishermen
  • individuals providing services pursuant to contracts for “professional services” (creative/original marketing work, human resources, travel agent services, graphic design, grant writer, fine artist, enrolled agent licensed to practice before the IRS, payment processing agent through an independent sales organization, certain still photographers/journalists, certain freelance writers, editors or cartoonists, certain licensed estheticians, electrologists, manicurists, barbers or cosmetologists), provided that the individual:
    • maintains a business location (which could be a residence) that is separate from the hiring entity;
    • has a business license and any other required professional licenses or permits;
    • can set or negotiate their own rates for the services performed;
    • has the ability to set their own hours (outside of project completion dates and reasonable business hours);
    • is customarily engaged in the same type of work performed under the contract with another hiring entity or holds themselves out to other customers as available to perform the same type of work; and
    • customarily and regularly exercises discretion and independent judgment in performing the work.
  • Certain real estate licensees licensed by the State of California
  • Certain licensed repossession agencies
  • Certain business-to-business contracting relationships
  • Certain contractor and subcontractor relationships in the construction industry.
  • Certain relationships between a referral agency and a service provider
  • Certain motor clubs

Business Service Provider Exemption

Bona fide business-to-business contracting relationships are exempt from the ABC test and instead governed by the Borello test only if ALL of the following apply:

  • The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work both under contract and in fact
  • The business service provider is providing services directly to the contracting business rather than to customers of the contracting business
  • The contract is in writing
  • If the work is performed in a jurisdiction that requires a license or business tax registration, the business service provider has the required license or tax registration
  • The business service provider maintains a business location that is separate from the business or work location of the contracting business
  • The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed
  • The business service provider actually contracts with other businesses to provide the same or similar services and maintains clientele without restrictions from t the hiring entity
  • The business service provider advertises and holds itself out to the public as available to provide the same or similar services
  • The business service provider provides its own tools, vehicles, and equipment to perform the services
  • The business service provider can negotiate its own rates
  • Consistent with the nature of the work, the business service provider can set its own hours and location of work
  • The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required

Retroactive Versus Prospective Liability

The bill attempts to address retroactive and prospective liability, but ambiguity still exists. AB 5 indicates:

  1. Dynamex and the ABC test apply retroactively “with regard to wage orders of the Industrial Welfare Commission and violations of the Labor Code relating to wage orders.
  2. All exceptions apply retroactively to the maximum extent permitted by law, to the extent they would relieve an employer from liability. (There is some ambiguity about the retroactivity of these exceptions to the ABC test because while AB 5 uses the term “to the maximum extent permitted by law,” it does not further clarify how the application of the exceptions may be limited.
  3. On and after January 1, 2020, Dynamex and the ABC test will apply for purposes of the Unemployment Insurance Code and all other provisions of the Labor Code.
  4. On July 1, 2020, Dynamex and the ABC test will apply for purposes of workers’ compensation.

 Next Steps for Employers

Employers should evaluate the status of their current independent contractors and whether they are properly classified under AB 5. Workers who do not fall under an exemption outlined in AB 5 and who do not satisfy the ABC test should be converted to employee status.

For the full text of AB 5, please click here.

[i] Dynamex Operations West, Inc. v Superior (2018) 4 Cal.5th 903.

[ii] S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. The factors considered under Borello include:

  • Control over work details
  • Whether the person performing services is engaged in an occupation or business distinct from that of the principal
  • Whether or not the work is a part of the regular business of the principal
  • Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work
  • The alleged employee’s investment in the equipment or materials required by his task
  • The skill required in the particular occupation
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision
  • The alleged employee’s opportunity for profit or loss depending on his managerial skill
  • The length of time for which the services are to be performed
  • The degree of permanence of the working relationship
  • The method of payment, whether by time or by the job
  • Whether or not the parties believe they are creating an employer-employee relationship.

 

Please note that this summary is not intended to constitute legal advice. If you have questions regarding compliance with AB 5 or other employment laws, please feel free to contact either Kristin Pedersen or Maki Daijogo at Daijogo & Pedersen, LLP through our website, www.dpemploymentlaw.com, or by calling us at 415.924.9400.