As of January 1, 2020, many employers in California will find it almost impossible to make use of independent contractors. This process began last year with a landmark California Supreme Court decision establishing a three-pronged test to determine if a worker should be classified as an independent contractor or employee. That decision has now been codified, with Governor Gavin Newsom signing A.B. 5 into law on September 18, 2019. This sweeping bill affects most industries employing Californians (with a few notable exceptions).

The new law adopts the “ABC Test” established by the California Supreme Court in the Dynamex Operations West v. Superior Court, 4 Cal. 5th 903 on April 30, 2018. It also creates California Labor Code section 2750.3, which will require businesses to satisfy each of the three prongs of the “ABC” test for purposes of the California Labor Code (wage and hour), the California Unemployment Insurance Code (unemployment insurance claims), as well as the Industrial Welfare Commission Wage Orders (wage and hour).

Notably, section 2750.3 makes no mention of compliance with any statutes relating to discrimination, harassment, and retaliation in the workplace. Such an omission will likely create confusion about standards for individuals asserting such claims and will probably result in litigation or an amendment to the statute in the future.

What is the ABC test? Well, it requires the hiring business to establish that an independent contractor:

(A) 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) performs work that is outside the usual course of the hiring entity’s business; and

(C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the hiring business fails to establish one of these factors, the worker must be classified as an employee and receive all rights and benefits afforded under the panoply of California employment laws. These include minimum wages, meal and rest periods, unemployment insurance, paid sick leave, and many others.

Some California businesses received good news. The new law expressly exempts certain trades and professions from application of the “ABC” test, including lawyers, architects, engineers, private investigators, accountants, real estate brokers, physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians. Those who are exempt may continue to rely upon the longstanding multi-factor standard known as “the Borello test” or “the Borello factors.” See S. G. Borello & Sons, Inc. v. Department of Indus. Rel., 48 Cal. 3d 341 (1989).

In addition, workers performing a “contract for professional services” (e.g., marketing and human resources) may continue to rely on the Borello test provided that they meet an additional six criteria set forth in A.B. 5, including a separate business location from the hiring entity and a business license.

Given the numerous exemptions and additional tests for some of these exemptions, businesses should consult with qualified counsel, as the ABC test is not as simple as applying the three factors.

Although the new law takes effect on January 1, 2020, A.B. 5 states that it “does not constitute a change in, but is declaratory of, existing law,” which courts generally interpret as having retroactive effect. Fortunately, such retroactivity appears to include the newly clarified exemptions.

This sweeping legislation makes it even more important for businesses to work with qualified counsel in evaluating their current independent contractor relationships to ensure that their workers are properly classified. Consequences of misclassifying workers are severe and include potential damages of unpaid wages (including minimum wage, overtime and double-time), meal and rest period violations, liquidated damages, interest, penalties and wage statement violations. Businesses may also face steep fines and penalties (up to $25,000) and tax liabilities.