On September 18, California Governor Gavin Newsom signed into law Assembly Bill ("AB 5"). The new law codifies into law last years blockbuster California Supreme Court's Dynamex decision which made it extremely difficult for employers to classify a worker as an independent contractor. 

Over the last several years, California has taken numerous steps to etch away at the gig economy and what it perceives as businesses taking advantage of workers. Toward that end, the legislature declared that its intent behind AB 5 is to “ensure workers who are currently exploited by being classified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave. By codifying the California Supreme Court’s landmark, unanimous  Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.”


Summary of the New Law

AB5, first introduced in December 2018, codifies and expands the California Supreme Court’s opinion in Dynamex Operations West, Inc. v. Superior Court ( Lee ), 4 Cal. 5th 903 (2018), which adopted a three part test to determine employee status under California Wage Orders. To justify independent contractor status under Dynamex , the hiring entity has the burden of proving each of the following three factors under the so-called “ABC” test: (A) the worker 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; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

AB5 adopts the ABC test outlined in Dynamex and expands it, for most industries, beyond the Industrial Welfare Commission Wage Orders to the California Labor Code and Unemployment Insurance Code. AB5 specifically adds a new section to the Labor Code stating that for purposes of the Labor Code, the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, "a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the worker meets all requirements of the ABC test." It similarly amends the definition of "Employee" Under the Unemployment Insurance Code. 

AB5 states that the addition of the provision to the Labor Code does not constitute a change in, but is declaratory of, existing law with regard to violations of the Labor Code relating to wage orders of the Industrial Welfare Commission. AB5 also states that specified Labor Code provisions of the bill apply retroactively to existing claims and actions to the maximum extent permitted by law while other provisions apply to work performed on or after January 1, 2020.

AB5 would additionally provide that the bill’s provisions do not permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to the bill’s enactment. AB5 also provides that claims for injunctive relief to prevent misclassification may be initiated by the Attorney General of California, and specified local prosecuting agencies, such as various city attorneys.

Exemptions

AB5 creates a number of exemptions for specified occupations from the application of Dynamex and instead provides that the pre- Dynamex multifactor Borello test will continue to apply to those occupations (rather than the ABC test). The California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations , 48 Cal. 3d 342 (1989), created a multifactored test to determine if a worker is an independent contractor, including whether a company has the right to control the manner and means by which the worker performs work, whether the company has the right to hire/fire the worker, whether the company or the worker provide the tools and instrumentalities necessary for work, and the degree of skill required to perform the work.

The following identifies a number of exemptions set forth in the new law. However, keep in mind that many of the exemptions spell out detailed requirements that must be met in order for the exemption to be applicable, not all of which are identified below: 

The following professions are exempt:

  • Insurance brokers licensed by the state;
  • Physicians and surgeons,
  • Dentists,
  • Podiatrists,
  • Psychologists and veterinarian licensed by the state performing professional or medical services to or by a healthcare entity;
  • Lawyers,
  • Architects,
  • Engineers,
  • Private investigators and accountants who hold an active license;
  • Security brokers registered with the SEC;
  • Salesperson provided commissions are based on actual sales; and
  • Commercial fishermen

Certain contracts for " professional services " are exempt if the following factors are established:

  • The individual maintains a business location separate from the hiring entity;
  • The individual has a business license (6 month grace period);
  • The individual sets their own rates;
  • The individual sets their own hours;
  • The individual does the same type of work for other entities or holds themselves out as available to work for other entities;
  • The individual exercises discretion and independent judgment;

" Professional services " mean:

  • Marketing – provided the work is original and creative;
  • Administrator of human resources – provided the work is intellectual and varied in character;
  • Travel agent services;
  • Graphic writer;
  • Fine artist;
  • Agent licensed by the U.S. Department of Treasury to practice before the IRS;
  • Payment processing agent through an independent sales organization;
  • Still photographer / photojournalist who work on motion pictures (but limited to 35 submissions per year);
  • Freelance writers / editors / cartoonist (limited to 35 submissions per year);
  • Licensed esthetician, electrologist, manicurist, barber cosmetologist provided they set their own rates, process their own payments and are paid directly by the clients, have their own book of business and schedule their own visits and maintain a required license.


The new law also contains exemptions for the following: 

  • Real estate licensee; and
  • A repossession agent
  • A "business-to-business" contracting relationship if the following conditions are met: If the business entity provides services to another such business then Borello applies; however, the contract of the business service provider must be in writing, the business service provider must have a license (if one is required), and meet a number of other requirements, including providing their own tools, must be free from the control and direction from the contracting business; and must provide the services to the contracting business rather than to the customer of the contracting business.

Subcontractors in the construction industry if the following criteria are met:
    
  • The subcontract is in writing;
  • The subcontractor is licensed (trucking subcontractors are not required to have a contractor's license);
  • The subcontractor maintains a separate business location;
  • The subcontractor has authority to hire and fire others;
  • The subcontractor assumes financial responsibility for errors;
  • The subcontractor is customarily engaged in an independently established business of the same nature of the work performed.
  • When there exists a relationship between a referral agency and a service provider
  • if a number of criteria are met, including that the service provider is free from the control of the agency, delivers the services to the client under the service provider's name, and provides their own tools.

Employer Takeaways

This new law makes it more difficult for California businesses to successfully classify workers as independent contractors. Likewise, the new law will make it even more difficult for businesses to prevail on worker misclassification claims and to prevent such cases from being certified as class action lawsuits. Additionally, even if an individual qualifies for one of the numerous "exemptions" noted above, the individual must still meet the criteria set forth in the Borello case to properly qualify as an independent contractor. 

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at 818-508-3700 or visit us online at www.brgslaw.com


Sincerely,
Richard S. Rosenberg
Katherine A. Hren
Elsa Banuelos 
Ballard Rosenberg Golper & Savitt, LLP