September 27, 2019
Employment Law Alert
Author(s): Hillary Baca
On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5, which modifies the California Labor Code to adopt the California Supreme Court’s recent worker-friendly test for determining whether workers are properly classified as independent contractors. Or does it? The law exempts certain businesses and occupations, so long as certain conditions are met. Employers need to be aware of how their business fits in the new classification scheme.
On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (“AB5”), which modifies the California Labor Code to adopt the California Supreme Court’s recent worker-friendly test for determining whether workers are properly classified as independent contractors. The bill, which was strongly backed by organized labor, seeks to adopt the more-stringent test for worker classification and provide some legislative clarity on its application across the Labor Code. But the bill is a mixed bag that also contains a panoply of exceptions and carve-outs that will provide relief for certain California businesses. As is often the case with California employment legislation, the devil is in the details.
In April 2018, the California Supreme Court dramatically revised the test for whether workers should be classified as employees or independent contractors, overturning nearly 30 years of precedent. In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the court changed the way California businesses approach the use of independent contractors as part of their workforces, and made it more difficult for workers to maintain an independent contractor relationship with California businesses.
Before Dynamex, the multi-factor test for whether a worker was properly classified as an independent contractor focused primarily on the level of control the business exercised over the worker. This test was adopted by the California Supreme Court in 1989 in the matter of S.G. Borello & Sons, Inc. v. Department of Industrial Relations. Dynamex replaced this test with a three-factor “ABC” test. The ABC test is a rigid, worker-friendly test for determining whether workers are properly classified as independent contractors.
The ABC test presumes that all workers are employees, unless the business can demonstrate that all of the following factors are met: (A) The worker is free from the control and direction of the hirer in connection with the performance of the work; (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 for the hiring entity. The burden is on the hiring entity to prove that the worker meets all three elements of the test. Failure to meet even one element will result in a finding that the worker should be classified as an employee.
The text of AB5 is lengthy, but it essentially (1) adopts the Dynamex ABC test as the generally applicable test for California employers, and (2) specifically exempts certain occupations and business relationships from the ABC test, providing that the less-stringent Borello test will continue to apply to those industries under certain conditions.
Where the ABC test should apply, the legislature adopted the Supreme Court’s language, setting forth the ABC test verbatim. Additionally, although Dynamex previously imposed the ABC test on worker classification under the California Industrial Welfare Commission (“IWC”) Wage Orders, AB5 makes clear that the Dynamex test should apply beyond the wage orders to all provisions of the California Labor Code and the Unemployment Insurance Code.
However, if a California worker falls into one of the following categories, the business relationships will continue to be governed by the less-stringent, multi-factor Borello test, in certain circumstances:
Many of these exceptions, particularly the occupational exceptions, will provide relief to some California businesses that regularly rely on “bona fide” independent contractor relationships. It must be emphasized, however, that the many of these exceptions only apply for limited engagements or where certain additional criteria are met. Also, the specific criteria that must be met may be different for different occupations and industries. Therefore, even businesses that fall under an exception may have to consider reviewing the structure of their relationships with independent contractors and monitoring the scope of their engagements.
In Dynamex, the California Supreme Court left open the question of whether ABC test should be applied retroactively. Recently, the Ninth Circuit Court of Appeals referred this question to the California Supreme Court. California businesses are still awaiting that decision.
For its part, the legislature included text in AB5 that makes Dynamex retroactive for IWC wage orders and violations of the Labor Code “relating to wage orders.” However, it remains unclear what Labor Code violations are sufficiently related to the wage orders to invoke the retroactive application of Dynamex.
AB 5 further provides that:
If one of the Borello exceptions does not apply, then California businesses must still be particularly wary of the second prong of the ABC test. Arguably the most-consequential factor of the ABC test, prong (B) requires that the worker perform work that is outside the usual course of the employer’s business. In Dynamex, the Supreme Court noted that the ABC test will not transform a retail store’s hiring of an outside plumber or electrician into an employee, because the services of the plumber or electrician are not part of the store’s usual course of business. On the other hand, prong (B) presents much more of a challenge for companies that rely heavily on outside labor contractors whose business operations align with the work of the contractors, such as those in technology and other emerging markets (including the on-demand gig economy) and businesses that generally rely on contractors to supplement their traditional workforces.
Prong (B) has essentially forced ride-share app-based companies like Uber and Lyft to resort to adopting the argument that they could pass the ABC test because they are not cab companies, but rather are technology companies that merely provide applications that connect drivers to passengers. While this argument has not yet been fully tested through the court system, it is unclear whether California trial and appellate courts will find this logic convincing.
That said, AB5 does provide clarity and peace of mind to California business relationships that fall under one of the law’s Borello exceptions. Freelance writers, aestheticians, and others can breathe a sigh of relief knowing that the less-stringent multi-factor control test applies, and not Dynamex and its devilish prong (B).
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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