United States: Codifying Dynamex, California Dramatically Alters Employee v. Independent Contractor Classification Standard

Last Updated: September 26 2019
Article by Ryan Frazier and Steven G. Gatley

Calif. (September 20, 2019) - On September 10, 2019, the California Legislature passed Assembly Bill 5 (AB 5) in a 29-to-11 vote. Thereafter, on September 18, 2019, the bill was signed by Governor Newsom. The bill dramatically alters the legal standard for evaluating whether a worker is an employee or an independent contractor. Beginning January 1, 2020, many individuals classified as independent contractors may be considered employees. However, the bill contains exceptions for specific businesses in which workers will remain independent contractors.

The Purpose of Assembly Bill

Per the Legislative Counsel’s Digest, AB 5 was intended to “codify the decision in the Dynamex case and clarify its application.” Further AB 5 is also intended to prevent the loss of state revenue that “use[s] misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance.” In addition, AB 5 will ensure that misclassified workers will be provided with the basic rights and protections, such as minimum wage, workers’ compensation benefits, unemployment insurance, paid sick leave, and paid family leave.

History of the Legal Standards

For many years, the Borello test was used to determine whether or not a worker was considered an independent contractor or an employee. (S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.) In 2018, the California Supreme Court issued the Dynamex decision, which adopted a more liberal test, known as the “ABC test” to determine whether or not a worker was an independent contractor or an employee. (Dynamex Operations West, Inc. v. Superior Court of Los Angeles  (2018) 4 Cal.5th 903.) However, the test was limited to wage orders issued by the Industrial Welfare Commission. Id.

The Dynamex ABC Test

The ABC Test presumes a worker is an employee, unless the hiring entity can show the following three conditions are met to classify the worker as an independent contractor.

  1. The person 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. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed

The media interprets this bill to target ride-share companies and other “gig economy” companies. Whether or not this is the case, companies affected or possibly affected by this law may seek additional exceptions through legislation or lawsuits challenging the law itself. For example, Lyft is engaged in a social media advertising campaign, which asks customers to demand the legislature “Fix AB 5.”

Additional bills further modifying the same sections of the Labor Code are both possible and likely. For example, on September 14, 2019, at midnight, the legislature passed AB 170, which provided a timed exception to the changes in AB 5 for the newspaper industry involving the status of newspaper carriers, who are currently classified as independent contractors.

Professions/Businesses Exempt from AB 5

The main effect of AB 5 is to amend California’s Labor Code section 2750.3. Labor Code section 2750.3, as proposed, contains a long list of exceptions. The qualifications for each exception may be different, so a careful reading is required. In brief summary, many workers meeting the following descriptions will be fully exempt and will continue to fall under the Borello test:

  • Insurance Analysist and Brokers (LC 2750.3 (b)(1))
  • Physicians, Surgeons, Dentists, Podiatrists, Psychologists or Veterinarians (LC 2750.3 (b)(2))
  • Licensed Professionals in the following fields: Lawyer, Architect, Engineer, Private Investigator, or Accountant (LC 2750.3 (b)(3))
  • Securities Brokers or Investment Advisors (LC 2750.3 (b)(4))
  • Direct Salespersons (as defined by Section 650 of the Unemployment Code) (LC 2750.3 (b)(5))
  • Commercial Fishermen working on an American vessel through January 1, 2023 (LC 2750.3 (b)(6))
  • Newspaper distributors and carriers until January 1, 2021 (LC 2750.3 (b)(7))
  • Contracts for Professional Services in which the contracting individual satisfies an additional test. (LC 2750.3 (c)) This includes the following professions:
    • Marketing
    • Administration of HR
    • Travel Agent services
    • Graphic Design
    • Grant Writer
    • Fine Art
    • Enrolled Agents for IRS representation
    • Payment Processing Agent
    • Still Photographers or Photo Journalists (with exceptions)
    • Freelance Writing (with exceptions)
    • Licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers or licensed cosmetologists (with additional exceptions)
  • Real Estate Agents (LC 2750.3 (d) – subject to a special test)
  • Repossession Agencies (LC 2750.3 (d) – subject to a special test)
  • “Business to Business relationships” in which one business performs a service for another (LC 2750.3 (e) – subject to a special test)
  • Subcontractors (individual or business) (LC 2750.3 (f) – subject to a special test)
  • Referral Agencies and Service Providing Business Entities (not individuals) (LC 2750.3 (g) – subject to a special test)
  • Motor Clubs (LC 2750.3 (h) – subject to proper licensing)

AB 5 Takes Effect on January 1, 2020

The new law applies to all work done after January 1, 2020, other than the exceptions detailed above – the codification of the exceptions applies retroactively, and for wage orders per the original Dynamex decision. (See, Labor Code section 2750.3 (i).)

Injunctive Relief Available to Prevent Continued Misclassification of Workers

Injunctive relief is available to “prevent the continued misclassification of employees” against the putative employer and can be undertaken by the attorney general, select city attorneys, and city prosecutors depending on the size of the city. (See, Labor Code section 2750.3 (j).)

AB 5 Will Apply to Workers’ Compensation Claims Beginning July 1, 2020

AB 5 will apply to workers’ compensation claims beginning July 1, 2020. There will not be retroactive application. This may create disputes with regards to cumulative trauma claims (e.g. claims that an applicant was injured gradually as a result of work activities over time) which span the date change in which the same person doing the same activities might become an employee on July 1, 2020 for claims made after July 1, 2020. The way the section is drafted may also give rise to claims that the section can be applied to “work” done after January 1, 2020. However, the code appears to be designed to only grant employee status (thus workers’ compensation benefits) starting on July 1, 2020. (See, Labor Code section 3351 (i).)

Current Employees Will Not Be Classified as Independent Contractors

The legislature indicated “no provision of this measure shall permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to this measure’s enactment.”

Conclusion

For businesses who either utilize the services of independent contractors or insure those who do, it is important to note that significant business policy changes may be required in regards to the classification of workers, to either classify and treat them as employees, or to ensure that all standards are met to ensure the workers qualify as independent contractors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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