Effective Jan 1, 2020, California enacted AB5, a bill with sweeping changes to employment law, severely limiting who may be classified as an independent contractor. These new requirements will impact “gig” workers which are individuals who work through online hiring platforms such as Uber and Postmates as well as a wide range of other professions and businesses.
The bill resulted after the California Supreme Court issued a ruling in the Dynamex Operations West Inc. v. Superior Court of Los Angeles case in 2018. In 2004, Dynamex, a nationwide courier company, reclassified its drivers as independent contractors rather than employees in order to save costs. After leaving the company, an employee filed a lawsuit alleging Dynmaex misclassified its workers, violating various sections of the Labor Code. The California Supreme Court determined that misclassifying workers as independent contractors is unfair to workers, competitors, and the public. Such workers do not receive the same protections and benefits that employees are guaranteed such as a minimum wage, overtime pay, unemployment and workman’s compensation insurance, etc. Therefore, the courts ruled that all workers are presumed employees rather than contractors, replacing the Borello Test with new standards that must be met in order for workers to continue as independent contractors.
Named the “ABC Test,” workers may only be considered independent contractors if the hiring entity can demonstrate, “A) that the worker is free from 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) that the worker performs work that is outside the usual course of the hiring entity’s business; and C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. The courts have to yet to determine how “usual course of business” will be defined.
While the law will impact a number of industries and businesses, it provides for a number of exemptions. In order to prove the exemption applies, businesses must still pass the Borello Test along with other requirements. Exemptions fall into several categories including:
Specific Occupations: insurance agents, veterinarians, dentists, physicians, accountants, direct sales salespeople, commercial fishermen, private investigators, accountants etc.
Professional Services: those engaging in certain contractual services in the areas of marketing, human resources, travel planning, graphic design, grant writing, freelance writing, photojournalism, hairdressing etc. Workers in these fields must meet a host of requirements such as maintaining a business location, a business license, setting and negotiating their own rates and hours, and exercising discretion in the performance of services.
Real Estate Licensees and Repossession agencies
Business to Business Contractors: Must meet a list of 12 requirements
Businesses That Obtain Work Through Referral Agencies: This includes work such as web design, tutoring, minor home repairs, dog grooming and walking, home cleaning, furniture assembly, event planning, yard/pool maintenance etc. In order to prove the exemption applies, the business must satisfy a list of 10 requirements
Construction Subcontractors: The subcontractor must satisfy a list of seven conditions to prove independent contractor status is appropriate.
Certain Motor Club Services
Future of AB5
Since the passage of AB5 a number of lawsuits have been filed which allege that AB5 makes it impossible for certain businesses to operate. Uber, Postmates, and the trucking industry have received temporary exemptions while the courts evaluate whether AB5 should apply.
At this point we have yet to see how AB5 will be enforced and to what degree. The bill enables the California Attorney General, city attorneys, and local prosecutors to sue companies. This would result in a judge deciding whether such company would need to reclassify its workers.
The implications of AB5 will result in two major consequences. Undoubtedly, certain workers will no longer meet the new Independent Contractor requirements and will have to find other means of income. This could be tens of thousands of workers in the state that are suddenly out of work. In addition, experts predict that AB5 will result in an increase in costs to businesses and consumers as businesses will incur additional costs when their contractors become employees.
How to Prepare
One thing remains clear, AB5 will continue to evolve over time as the courts evaluate the appropriate application. In the meantime, it’s important that your businesses makes the necessary adjustments. Take time to evaluate the law and how it may impact your business and seek legal counsel from an employment attorney to help ensure you have taken all the necessary steps to come into compliance.