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California Passes AB-5 Making It More Difficult for Businesses to Classify Workers as Independent Contractors

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On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (AB-5), which drastically limits many employers’ ability to classify workers as independent contractors.

AB-5 codifies the California Supreme Court’s holding in it Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903 [232 Cal.Rptr.3d 1, 416 P.3d 1] (“Dynamex”), which changed the way employers classified independent contractors under California’s IWC wage orders from the longstanding Borello test (an eleven-factor test which primarily focused on an employers’ control over a worker) to a much stricter “ABC” test.

Under the “ABC” test, a person providing labor is presumed to be an employee of a hiring entity unless the employer proves:

  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.

Although Dynamex only applied to misclassification claims brought under California’s IWC wage orders, AB-5 expands the application of the “ABC” test to all claims brought under the California Labor Code and Unemployment Insurance Code.

The bill contains numerous exceptions for occupations and contracting arrangements including lawyers, doctors, dentists, psychologists, veterinarians, architects, private investigators, engineers, accountants, securities broker dealers, investment advisors, insurance brokers, commercial fisherman, repossession agents, and real estate agents.  Those exempted are subject to classification under the former Borello test.

Further, independent contractors providing certain types of “professional services” (including, marketing, human resources, travel agents, graphic designers, graphic writers, fine artists, photography, freelance writers, editors, newspaper cartoonists, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, and licensed cosmetologists) will not be subject to the “ABC” test if they meet a separate, six-factor test focusing largely on whether they operate an independent business.

AB-5 also provides exceptions for construction subcontractors, “bona fide business-to-business contracting relationships”, tow-truck drivers, and referral agencies (i.e., “a business that connects clients with service providers that provide graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup”).

Businesses in California that use independent contractors should immediately contact an attorney before January 1, 2020 (AB-5’s effective date) to evaluate whether their current contractor relationships are subject to an exception or pass the “ABC” test.  If a contractor does not meet the “ABC” test and is not subject to an exception, an attorney will be able to assist in developing a strategy to transition current independent contractors to W-2 employees, with the least amount of risk.