United States: Out Of The Frying Pan: California's New Contractor Law Answers Some Questions, Creates Many More

Last Updated: October 8 2019
Article by Tao Leung, Michelle Roberts Gonzales and Ashley King

On September 18, 2019, California Governor Gavin Newsom signed into law a bill that attempts to settle some of the ambiguity that remained surrounding the California Supreme Court's decision in Dynamex and its "ABC Test." While the new bill may have resolved some outstanding questions, the uncertainty is far from over.

As we previously covered, the California Supreme Court's Dynamex decision in April 2018 largely displaced the Borello test with its lengthy list of factors, and instead decided that workers are presumed to be employees rather than independent contractors unless they can show: (A) the worker is free from control of the hiring entity (in contract and fact); (B) the worker is performing work outside the usual course of the hiring entity's business; and (C) the worker is customarily engaged in an established trade.

The employee presumption, coupled with the difficult-to-pass test, has largely been viewed as a threat to the

so-called "gig" economy, and the new law, passed as AB 5 and codified as Labor Code Section 2750.3, does not resolve that uncertainty. Instead, it codifies the ABC Test for most workers, while at the same time creating numerous exceptions.

What We Do Know

To be sure, the new law does provide some clarity as to the scope of the ABC Test.

First, it syncs up the definitions under the Labor Code, wage orders, and unemployment insurance code – ending the debate as to whether courts would have needed to apply different tests for determining whether the same individual would be considered an employee – the ABC Test for claims under the wage orders (which set things like minimum wages and overtime) and claims under the Labor Code (which, for example, requires reimbursement of business expenses).

Second, it creates some exemptions from the ABC Test that allows some occupations to continue to be governed by the multi-factor Borello test, but these exemptions are narrow/industry-specific, and may require the hiring entity to satisfy separate multi-factor tests just to qualify for the exemption (see examples below). If an exemption is applicable, such exemptions apply retroactively to existing claims.

Unfortunately for some employers though, the Legislature resolved another ambiguity (previously covered here) when it declared with the passing of AB 5 that the ABC Test applies retroactively to those who don't qualify for exemptions.

What Still Remains to Be Seen

Despite the additional clarity that the Legislature provided on some issues, significant ambiguity remains. The gig-economy companies have reportedly made plans – and contributed significant amounts of money – to back a ballot initiative that would provide a way to keep app-based drivers as independent contractors.

And even if voters do not change the law, the new Section 2750.3 will require companies to make fact-intensive inquiries to determine which test or exemption applies. By way of example, the classification of certain licensed occupations, such as physicians, lawyers, dentists, licensed engineers, and others will still be governed by the Borello test. Individuals that perform services via a contract for "professional services," such as marketing professionals, HR administrators, photojournalists, etc. will be subject to the Borello test only if the hiring entity is able to demonstrate six separate factors regarding the contractor's independence (i.e. maintains a business location separate from hiring entity, ability to set or negotiate their own rates, etc.) And in the case of a business-to-business contracting relationship, the use of the Borello test is proper if the contracting entity demonstrates that twelve different criteria are met (i.e. the contract is in writing, the business service provider provides its own equipment, the business service provider is free from the control and direction of the contracting business, etc.)

In short, while AB 5 was presumably intended to clarify the scope and applicability of the Dynamex holding by whittling down the number of separate tests used to evaluate the proper classification of contractors, it is clear that AB 5 has actually resulted in creating even more tests just to determine whether the ABC test or the Borello standard should apply. And irrespective of the complexity of the new law, it is indisputable that the law is a significant blow to any company that utilizes independent contractors in California.

The new law can be found here.

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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