United States: California Lawmakers Send AB5 To Governor's Desk

The California Legislature has passed legislation designed to make it much more difficult for companies—including but not limited to those in the "gig economy"—to treat workers as independent contractors. Assembly Bill 5 (AB5), first introduced in December 2018, codifies, extends, and puts certain parameters around the California Supreme Court's opinion in Dynamex Operations West, Inc. v. Superior Court (Lee), 4 Cal. 5th 903 (2018).1 In that case, the court adopted a more rigid method of determining employee status under California's Wage Orders than had previously applied. To justify independent contractor status under Dynamex, an alleged employer must establish 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. If signed into law, AB5 could result in the reclassification of a substantial number of workers under state law.

AB5's Current Status

The bill passed in a 29-to-11 vote along party lines in the State Senate on September 10, 2019, and in a 61-to-16 vote in the State Assembly the following day. It next heads to Governor Gavin Newsom—who endorsed the bill on Labor Day—for signature. Governor Newsom has told The Wall Street Journal that he is still engaged in talks with Uber, Lyft, and other gig economy companies about the bill. Additionally, Uber, Lyft, and DoorDash have collectively contributed $90 million in support of a state ballot initiative intended to preserve the independent contractor status of their workers while offering protections and benefits to their contractors, including a minimum earnings floor and access to health care plans. If signed by Governor Newsom, the bill will go into effect on January 1, 2020.

Bill Content Overview

A. ABC Test

AB5 adopts the ABC test outlined in Dynamex verbatim and expands its reach, for most industries, beyond the Industrial Welfare Commission Wage Orders to the California Labor Code and Unemployment Insurance Code as well. The legislation's stated intention 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."

B. Exemptions

AB5 creates a number of exemptions for certain occupations, industries, and relationships. To the extent an exemption applies, in most circumstances, the pre-Dynamex multifactor Borello test will continue to apply (rather than the ABC test). Under the Borello rule—based on the California Supreme Court decision S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 342 (1989)—courts focus on whether a company has the right to control the manner and means by which the worker performs work. They also take into account secondary factors such as whether the company had the right to hire/fire the worker, whether the company or the worker provided the tools and instrumentalities necessary for work, and the degree of skill required to perform the work.

AB5 lists several specific occupations to which the traditional Borello test will continue to apply, including: insurance brokers; physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians; lawyers, architects, engineers, private investigators, and accountants who hold an active license from the State; securities broker-dealers, investment advisors, and their agents; direct sales salespersons as described in Section 650 of the Unemployment Insurance Code; and commercial fishermen. Certain contracts for "professional services" are also exempted, so long as they meet certain enumerated requirements, such as maintaining a business location and setting or negotiating their own rates. "Professional services" are defined as: marketing (provided the work is "original and creative in character"); administrator of human resources; travel agent services; graphic design; grant artist; fine artist; services by an enrolled agent who is licensed by the US Treasury Department to practice before the IRS; services by a still photographer or photojournalist; services by a freelance writer, editor, or newspaper cartoonist; and services by a licensed esthetician, electrologist, manicurist, barber, or cosmetologist. Several exemptions contain precise requirements that must be met in order for the exemption to be applicable.

The bill also contains several other miscellaneous exemptions, including for: real estate licensees; repossession agencies; the construction industry; and relationships between referral agencies and service providers. Several of these exemptions will apply if certain specific enumerated criteria are met, which vary from exemption to exemption. Interestingly, there is also a general "business to business" exemption. The exemption specifically recognizes that sole proprietorships can qualify, but states that the exemption is limited to "bona fide" business to business relationships. To qualify as a bona fide relationship, the relationship must satisfy 12 separate criteria. For example, the relationship must be governed by a written agreement, the business providing the service must similarly provide services to other businesses (aside from the alleged employer), and the business must provide services directly to the other business (as opposed to providing services to the other business' customers). Conversely, AB5 also contains a provision stating that "[n]o 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."

Since AB5 will be codified in the Labor Code, violations of its provisions will presumably be actionable under the Labor Code Private Attorney Generals Act, Labor Code §§ 2698 et seq. AB5 also provides that claims for injunctive relief to prevent misclassification may be initiated by the Attorney General of California, or by various city attorneys.

Finally, AB5 contains a savings clause that states that if its ABC test is found by a court to be inapplicable in a particular context, the traditional Borello test should apply. Presumably this provision is intended to cover situations where the ABC test may be preempted—for example, under the Federal Aviation Administration Authorization Act, 49 U.S.C. § 14501(c)(1).

Takeaways

AB5 is a complicated law, the full scope of which is beyond this alert. That said, assuming that AB5 is signed into law in its current form, companies in California should keep the following in mind:

  • Under AB5, virtually any independent contractor relationship—no matter how well-intended or generally accepted—could be invalidated, resulting in significant exposure. Companies should review all independent contractor relationships and ensure that an exception applies or that the ABC test can be satisfied.
  • Do not assume that an independent contractor relationship will be protected by an exemption for a particular industry or profession, because many of AB5's exemptions are subject to lengthy requirements and restrictions. To take just one example, it appears to be impossible to have a bona fide business-to-business independent contractor relationship without a written agreement.
  • The ABC test itself, and many of the qualifying criteria for AB5's exemptions, are conjunctive in nature. This means that if one part of the ABC test is not met, or if one criteria for an exemption is not satisfied, then the contractor may be misclassified. This is very different than the traditional Borello test, where no one factor is truly dispositive.
  • Keep in mind that AB5's effective date is January 1, 2020, which provides a short timeline for compliance. In addition, AB5 expressly states that its codification of the ABC test "does not constitute a change in, but is declaratory of, existing law with regard to wage orders of the Industrial Welfare Commission and violations of the Labor Code relating to wage orders."

Footnote

1 Our client alert on the Dynamex decision 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions