Beginning January 1, 2020, California employers will find it far more difficult to classify workers as independent contractors rather than employees. This is due to Governor Newsom signing Assembly Bill 5 (AB 5) into law on September 18, 2019.
AB 5 codifies the California Supreme Court’s decision last year in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (“Dynamex”). In Dynamex, the Court adopted the “ABC” test for determining whether a worker is an employee for purposes of applying California’s wage orders. Under the ABC test, a person providing labor or services is properly classified as an employee, unless the employer can establish all of the following elements:
A. 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;
B. The person performs work that is outside the usual course of the hiring entity’s business; and
C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
It is only when all of these elements are present that a worker can properly be classified as an independent contractor.
AB 5 enacts new Labor Code section 2750.3, which expands the holding in Dynamex by applying the ABC test not only to the determination of who is an employee under California’s wage orders, but also to that same determination under all provisions of California’s Labor and Unemployment Insurance Codes. In other words, every time the words “employee,” “employer,” “employ,” and “employment” are used in those codes, the applicability of those terms to an individual, or to the relationship between a person and a hiring entity, will be determined through application of the ABC test.
During the legislative process, AB 5 was the subject of intense lobbying by numerous industry and professional groups that sought to exempt various occupations from application of the ABC test. As a result, new Labor Code section 2750.3 lists dozens of occupations in which the determination of employee or independent contractor status is not governed by the ABC test, but rather by the older multi-factor test established by the California Supreme Court in S. G. Borello & Sons v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”) In Borello, the Court held that while the principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the desired result, additional factors must also be considered such as (a) the right to discharge at will, without cause; (b) whether the one performing service is engaged in a distinct occupation or business; (c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (d) the skill required in the particular occupation; (e) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (f) the length of time for which the services are to be performed; (g) the method of payment, whether by the time or by the job; (h) whether or not the work is a part of the regular business of the principal; and (i) whether or not the parties believe they are creating the relationship of employer-employee (the “Borello test”).
Included among the diverse occupations and professions listed in new Labor Code section 2750.3, in which the determination of an employer/employee relationship is governed by the Borello test, are doctors; lawyers; veterinarians; architects; engineers; accountants; securities brokers; commercial fisherman; individuals providing a variety of services under professional services contracts such as marketing, human resources administration, graphic arts, and several occupations; journalists; photographers; cosmetologists; barbers; and real estate agents or brokers.
In addition, new Labor Code section 2750.3 exempts from the ABC test bona fide business-to-business relationships, i.e., where one business (known as the “contracting business”) hires another business (known as the “business service provider”) to provide it with services. This exemption, however, is subject to a number of statutorily enumerated conditions. Similarly, contractor-subcontractor relationships in the construction industry and independent commercial truckers are exempted from the ABC test, but once again subject to a number of statutory conditions. Finally, individuals providing services through a “referral agency” (a business that connects clients with service providers) and who provide a diverse range of services from home repairs to dog walking to tutoring, and several others are exempted, but again there are a number of conditions that apply.
One of the more controversial aspects of AB 5 was the fact that no exemption was provided for occupations within the so-called “gig economy.” Accordingly, at least for the time being, the employment status of drivers working for Uber and Lyft, along with other workers in the gig economy, will be determined through application of the ABC test. These companies have promised to finance an effort to place an initiative on the 2020 ballot that would create a separate category under the Labor Code for their workers, unless the Legislature provides new exemptions applicable to those companies in its next session. Thus, it is likely there will be further revisions to new Labor Code section 2750.3 in the future.
In the meantime, employers that currently have workers classified as independent contractors should take a close look at those relationships to determine whether that classification meets the requirements of the ABC test. If not, and if one of the listed exemptions do not apply, employers must be prepared to make changes to these relationships by the time the new law takes effect on January 1, 2020. Attorneys in the Kronick Labor and Employment group are prepared to assist employers in evaluating their current independent contractor relationships to determine if such relationships can continue to pass muster under the new law.
If you have any questions concerning this Legal Alert or this or any other labor or employment-related matter, please contact the following from our office, or the attorney with whom you normally consult.
David Tyra
dtyra@kmtg.com | 916.321.4594