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AB 5 Is Making Waves in California by Changing the Way Businesses Classify Workers


AB 5 Is Making Waves in California by Changing the Way Businesses Classify Workers

AB 5 is making waves in California by changing the way companies will classify workers. AB 5 codifies the ABC test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.4th 903 (“Dynamex”). In Dynamex, the Court held that for violations of California’s wage orders, a worker is presumed to be an employee, unless the business proves the following:

  1. The worker is free from control and direction over the performance of the work, both under the contract and in fact;
  2. The work provided is outside the usual course of the business for which the work is performed; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business.

Subsequent courts have limited Dynamex to violations of California’s wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as required meal and rest breaks). However, AB 5 expands the scope of Dynamex by applying the ABC test to the Labor Code, including workers’ compensation claims, and the Unemployment Insurance Code. As a result, businesses may be liable for a variety of other Labor Code violations, such as penalties for not supplying accurate itemized wage statements and not reimbursing workers for business-related expenses (e.g., use of cellphone for work).

On the bright side, AB 5 provides several exemptions from the ABC test for specific occupations and fields. The exemptions listed in the bill will apply retroactively. The exemptions essentially fall into the following categories: (1) industry-specific; (2) contracts for professional services; (3) service providers; (4) referral agencies; (5) motor club contracts; and (6) construction industry.

Although there are numerous exceptions to the application of the ABC, this does not mean a business can automatically classify a worker as an independent contractor. To take advantage of an exemption, a business must first determine whether the worker satisfies certain criteria, such as determining whether the worker keeps required business licenses and tax registrations, and/or keeps a separate business location. Second, the worker must satisfy the flexible multi-factor test set forth by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”). The key element of the Borello test is the amount of control the business exerts over the worker, which is like part “A” of the ABC test. However, the Borello test includes several secondary factors to consider, such as whether the worker is engaged in a distinct occupation or business, supplies his/her tools and equipment, the method of payment, and the parties’ intent. (Dynamex, supra, 4 Cal.5th at 922 [citing to Borello, supra, 48 Cal.3d at p. 351].)

For instance, a travel agent who sets up a sole proprietorship and works from home may qualify as an independent contractor if she satisfies the other requirements for the professional services exception and the Borello test, such as the amount of control the contracting business exerts over the travel agent, the method of payment the travel agent receives for her services, and the travel agent’s intent when she contracts with a business.

Notably, AB 5 applies to more than hiring freelancers or consultants, but also business relationships. Under AB 5, vendors may claim that they are employees and not independent contractors. As an example, a janitorial company may claim they are employees of the contracting business unless the janitorial company satisfies the 12 requirements listed in the service provider exemption, such as supplying similar services to other clients, advertising similar services to the public and having a written contract, and satisfying the requirements of the Borello test (e.g., the amount of control over the janitorial company and the method of payment).

On September 18, 2019, Governor Gavin Newsom signed AB 5. AB 5 goes into effect on January 1, 2020, which means businesses have little time to review whether workers, vendors, and consultants are properly classified as independent contractors. Please note that businesses cannot reclassify individuals who were employees on January 1, 2019, as independent contractors due to the enactment of AB 5.

Notwithstanding the many exemptions, most workers previously classified as independent contractors will need to be reclassified as employees. Nevertheless, Dykema’s California Employment Counsel can assist in providing contractual relationships that may well avoid reclassification. We can also provide other protections to employers to lessen the financial impact of reclassification. For more information concerning worker classification issues, please contact one of the authors of this article or your Dykema relationship attorney.