In a signing statement on September 18, 2019, Governor Gavin Newsom declared Assembly Bill 5 “landmark legislation for workers and our economy.” AB5 codifies last year’s landmark decision, Dynamex Operations West, Inc. v. Superior Court, in which the California Supreme Court adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders promulgated by the Industrial Welfare Commission (IWC). Wage orders govern a limited number of basic working conditions for employees, including the payment of minimum wages, meal and rest period protections, and overtime. Specifically, there is now a presumption that workers are employees (and therefore not contractors) unless the employer can affirmatively prove three things (sometimes referred to as the “ABC” test): (A) that the worker is free from the control and direction of the hirer 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 that involved in the work performed.
AB 5 also clarifies that Dynamex applies to the Labor Code and Unemployment Insurance Code. In other words, if workers are employees under Dynamex, they are also entitled to other employment benefits, including paid sick days, and the protections of the unemployment insurance code. For example, individuals who qualify as employees under Dynamex also now have claims they should be reimbursed for business expenses that arise from California Labor Code Section 2802 (for example, mileage for business-related travel or data reimbursement if required to use a personal cell phone).
Importantly, AB 5 exempts specified occupations from Dynamex. Among the exemptions are licensed insurance agents, certain licensed healthcare professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services with another business entity or under a subcontract in the construction industry. The last category covers a variety of services, including marketing, human resources administration, graphic design, grant writing, and freelance writing, editing, and photojournalism, provided that they do not license or provide content to the putative employer more than 35 times a year and there is a written contract that defines the scope of the services.
This does not mean that these professions are statutorily employees but that the employer must still meet the less onerous “Borello” test previously applied by California courts to determine whether an individual is an employee or independent contractor. Specifically, the Borello test’s principal factor is whether the putative employer has “the right to control the manner and means of accomplishing the result desired.”
To read the full text of AB5, click here.
Why it matters: The new law provides some clarification and certainty to employers following last year’s Dynamex ruling. It also codifies that certain professions may qualify for independent contractor classification if the right steps are taken. For instance, a freelance journalist may have been considered an employee under Dynamex alone—however, such a person may now qualify for independent contractor status if they have a written contract and provide only a limited number of content submissions in a year. Despite this, there remain ambiguities about AB5 and the interpretation of each element of the ABC test. And misclassification of workers can still result in significant legal exposure with respect to wage and hour compliance.
What is clear is that California is still aggressive in classifying individuals as employees, and that the decision to classify a worker as an independent contractor in California should be done with the skilled assistance of counsel.