AB 5, Codifying Dynamex and Broadening the ABC Test’s Application, Passes California Legislature

Executive Summary: After months of debate and negotiations, the California State Legislature passed the controversial AB 5 on Wednesday, September 11, 2019, bringing it one step closer to being law. If passed, the new law is expected to impact and clarify the use of independent contractors throughout the state. It is now on Governor Newsom’s desk. If signed, it will go into effect on January 1, 2020.

While the bill is being branded by much of the non-legal press as a bill that will mandate sweeping changes to the use of independent contractors in California, especially in the gig economy, the actual legal impact of the bill is far less clear. Contrary to much of the reporting on the bill, AB 5 does not create any new independent contractor test or mandate that any specific company or industry convert workers from contractors to employees. Specifically, it does not explicitly convert gig economy workers from contractors to employees. Rather, AB 5 codifies the existing “ABC Test” that was set forth by the California Supreme Court last year in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (click here for a full discussion of Dynamex: https://www.fordharrison.com/the-new-abcs-of-independent-contractor-classification-in-california) to evaluate independent contractors under California’s Wage Orders and applies that same test on a broader scale. As set forth in Dynamex, the ABC Test presumes workers to be employees unless an employer can establish three factors: (1) that 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; (2) that the worker performs work that is outside the usual course of the hiring entity’s business; and (3) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In addition to codifying the holding in Dynamex, AB 5 expands the application of the ABC Test beyond just the Wage Orders, applying it to the Labor Code and Unemployment Insurance Code. Prior to AB 5, and after Dynamex, classifying a worker as an employee or independent contractor under provisions of these codes was arguably analyzed under the more lenient “Borello Test,” and not under the ABC Test. The Borello Test, as first set forth in S. G. Borello & Sons, c. v. Department of Industrial Relations (1989) 48 Cal.3d 341, looks to multiple factors to answer a principle question of whether the person receiving a service has the right to “control the manner and means” of completing that service. Under AB 5, the ABC Test will uniformly govern the independent contractor/employee determination under the Labor Code, the Unemployment Insurance Code, and the Wage Orders for most industries.

AB 5, however, does not apply the ABC Test across the board. The bill specifically exempts a number of occupations that will continue to be analyzed under the Borello Test. The exempted occupations include: insurance brokers, accountants, securities broker-dealers, investment advisors, physicians, surgeons, dentists, podiatrists, psychologists, veterinarians, attorneys, architects, engineers, commercial fisherman, persons engaged in direct sales, builders/contractors, and persons provided professional services such as marketing, human resources administration, travel agent services, graphic design, grant writing, fine art, freelance writers and photographers, barbers, cosmetologists, manicurists, estheticians, electrologists, manicurists, and tutors.

There has been significant media coverage over the fight for exemptions from gig economy companies. While the gig economy did not receive an exemption under the final version the bill, the bill does not (as some coverage has implied) explicitly mandate that gig economy workers must be classified as employees. In fact, considering that the bill’s primary effect is to codify the existing Dynamex decision, its immediate impact on the classification of workers may not be as universally widespread as some have predicted. With that said, the bill, if passed, will drastically change the independent contractor/employee landscape in California. If signed by the governor, employers are strongly encouraged to review the classification of any independent contractors in California.

Stay tuned for an in-depth analysis of the law in the event of the Governor’s signature. If you have any questions regarding this Alert, please contact the authors, Ross Boughton, rboughton@fordharrison.com, Managing Partner of FordHarrison’s San Francisco office, Jack Schaedel, jschaedel@fordharrison.com, partner in our Los Angeles office or Daniel Lyman, dlyman@fordharrison.com, associate in our San Francisco office. You may also contact the FordHarrison attorney with whom you usually work.

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