Assembly Bill 5, signed into law on September 18, generally codifies Dynamex and establishes difficult standards for classifying workers as independent contractors. Employers should review their independent contractor agreements and relationships to confirm classification status.

In a move that will make it much more difficult for most businesses operating in California to use independent contractors and other smaller entrepreneurial businesses as nonemployees, California Governor Gavin Newson signed Assembly Bill 5 (AB 5) into law on September 18. The bill generally codifies and expands the scope of the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court.

For the last 30 years, California courts have addressed employee/independent contractor classification disputes using a test first articulated in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). Under the Borello test, the distinction between employees and independent contractors hinged on a number of factors centered generally around control of the worker, but also considered a number of additional factors. On April 30, 2018, the California Supreme Court in Dynamex largely uprooted the Borello test and replaced it—with respect to the application of California’s Industrial Welfare Commission Wage Orders (Wage Orders)—with a newly articulated ABC test. Although a handful of other jurisdictions have previously adopted similar ABC tests, this was a new standard in California that was not based on any statutory or regulatory language adopting the test. However, the test only applied to claims based on Wage Orders, such as minimum wage, overtime, and meal and rest breaks; it did not apply to “pure” California Labor Code claims or unemployment claims.

Under the Dynamex ABC test, “a person providing labor or services for remuneration” is an “employee rather than an independent contractor” unless the hiring company demonstrates that the worker in question satisfies all of the following three conditions:

  1. The worker is free from the control and direction of the hirer in the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Under AB 5, the ABC test is extended to the California Labor Code and Unemployment Insurance Code (in addition to the Wage Orders). AB 5 also empowers the California attorney general and city attorneys of cities with populations of more than 750,000 to seek injunctive relief to force the reclassification of workers.

AB 5, however, also introduced several exceptions to the ABC test, where the Borello test will still continue to apply to covered workers—meaning that it will be less challenging to treat those workers as independent contractors. These exceptions include doctors, dentists, and veterinarians; lawyers, architects, engineers, private investigators, and accountants; securities broker-dealers and investment advisers; insurance agents; human resources administrators; travel agents; marketers, graphic designers, grant writers, fine artists, and certain photographers or photojournalists; and certain freelance writers and editors. There are also exceptions that carry certain conditions that must be satisfied for the Borello test to apply, such as for business-to-business contracting relationships and very limited categories of relationships between a referral agency and a service provider. The legal standard will apply retroactively to claims under the Wage Orders or Labor Code violations related to the Wage Orders. AB 5’s seven enumerated exceptions will also apply retroactively to existing claims and actions.

In passing the bill, the legislature stated that it intended “to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” The legislature further stated that the law “restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.”

Now that AB 5 has been signed into law, the standards enumerated there will be codified by new Labor Code Section 2750.3, effective January 1, 2020, for the Unemployment Insurance Code and all other provisions of the Labor Code, and July 1, 2020, for workers’ compensation claims.

Many California companies have already been adopting modified practices following Dynamex to ensure compliance and to minimize misclassification claims. Following the passage of AB 5, it is even more important to have a clear understanding of the current legal standards, and to apply appropriate compliance safeguards. Misclassification of workers can result in significant costs and wage and hour liability, as well as expenses for employee benefits, unemployment insurance, and workers’ compensation. Now is the time to review independent contractor agreements and relationships and consider reclassification if necessary.