The new law (AB5-2019) codifies and expands on an April 2018 California Supreme Court decision that set a strict new test for employers. Independent contractors must be free to perform their work as they wish, must be in a different line of work from the company contracting with them and must operate their own business.
In April 2018, when the California Supreme Court issued an unprecedented ruling that undermined its own previous decisions and adopted what is known as the ABC test for determining independent contractor status. Prior to this decision, employers used a flexible multifactor balancing test to determine whether a worker was a contractor or employee. But under the now infamous Dynamex ruling, a worker is considered an employee under the state Wage Orders unless the hiring entity establishes all three of these prongs:
- 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 such work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- 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.
Starting January 1, 2020 – but with retroactive effect as of that date – the bar will be raised to unprecedented heights. Businesses, except for those lucky enough to secure an exemption from the state legislature, will have to comply with the ABC test or face a raft of legal problems.
While the Dynamex ruling applied only to California’s Wage Orders and therefore was limited to minimum wage, overtime, and meal and rest break liability, AB 5 goes several steps beyond. Those workers considered misclassified under the new state law will also be eligible for workers’ compensation coverage, unemployment insurance, various benefits, paid sick days, and state family leave.
Moreover, because hundreds of thousands of workers will now be considered employees, they will also argue they are covered by state civil rights laws, including the most common discrimination and harassment protections. Last, but certainly not least, those workers considered employees and not contractors may now have the ability to organize themselves into labor unions, depending on how federal labor law is read in concert with the new state law, which is something that businesses with a contractor workforce have never had to worry about before.
If there is a silver lining, it is that AB 5 does limit the ABC test to a certain extent and provides an exempted list of workers who are not affected by its reach. This list includes:
- doctors, dentists, and veterinarians;
- lawyers, architects, engineers, private investigators, and accountants;
- securities broker-dealers and investment advisers;
- human resources administrators;
- travel agents;
- marketers, graphic designers, grant writers, fine artists, certain photographers or photojournalists, and certain freelance writers and editors; and
There are also several classifications of exemptions that carry certain conditions. For example:
- Commercial fishermen are exempt from all requirements except from unemployment insurance;
- Estheticians, electrologists, manicurists, barbers, and cosmetologists are exempt but only if they set their own rates, are paid directly by clients, schedule their own appointments, and follow several other requirements more akin to independent workers than employees; and
- Salespersons are exempt, but their pay must be based on actual sales as opposed to wholesale purchases or referrals.
While it is possible that other exemptions will be carved out of the statute in future legislative sessions, it is time for California businesses to adjust to the new normal and begin AB 5 compliance efforts right away.
Even Business-to-Business Arrangements Are Affected
Although much of the publicity surrounding AB 5 has focused on businesses that hire independent contractors, the bill’s reach is far more extensive. Businesses may find themselves liable to the employees of their vendors even if those vendors are large, established businesses. This is because a vendor’s employees may be able to claim they are also employees of the “contracting business” under the ABC test unless the contracting business can satisfy 12 different requirements outlined in the law.
Among those, the business retaining a vendor must now prove that any vendor they hire actually provides the same or similar business services to other clients, and the vendor must provide services directly to the business, not to the business’s customers. The bill even requires, among other things, that the vendor advertise its services to the public.
Please contact your employment services attorney for details of this new law and how it might affect your business.