Key Takeaways:

  • AB 5 codifies and clarifies the California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles

  • The passage of AB 5 means that millions of Californian workers may need to be reclassified

  • Where compliance is not met, AB 5 empowers the attorney general, city attorneys, and other local prosecutors to bring suit against companies over violations

With the ever-changing dynamics within the California employment sphere, California businesses face yet another watershed moment: the passage of California Assembly Bill No. 5 (AB 5).

On Wednesday, September 18, 2019, Gov. Gavin Newsom signed AB 5 into law, hailing the new law as a “landmark legislation” that would reduce worker misclassification, an “important step” in the pathway to “create lasting economic security.” Whether this law will establish such economic security remains to be seen, but the pathway there is anything but secure for California employers.

AB 5 codifies and clarifies the California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903. Note that under Dynamex, the existing law requires a three-part test, more commonly referred to as the ABC test, in determining a worker’s classification as either an independent contractor or an employee. The Dynamex ABC test dictates that workers are, by default, employees unless the hiring entity is able to establish each of the following:

  1. The worker is free from control and direction of the hiring entity over performance of the work, both under the contract 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

While AB 5 may seem like a delayed echo of Dynamex, it is important to note that while Dynamex was limited to wage and hour claims, AB 5 expands its application broadly to the entire California Labor Code, the Unemployment Insurance Code, as well as the wage orders of the Industrial Welfare Commission (IWC). AB 5 further applies retroactively to existing claims and actions “to the maximum extent permitted by law.” In other words, companies facing existing misclassification suits must reassess their exposure under a new standard that will be applied to their past conduct.

There are, however, a narrow list of specified occupations that, in addition to existing statutory exceptions, would be exempt from the ABC test. This list includes medical professionals, lawyers, architects, engineers, private investigators, accountants, securities broker-dealer or investment advisers, direct sales salespersons, commercial fishermen, aestheticians, hairstylists, and real estate agents, among others, many of which have their own limiting clarifications specified in the text of AB 5. Notably, AB 5 explicitly prohibits an employer to reclassify a worker who was an employee on January 1, 2019, to an independent contractor due to AB 5’s enactment.

In the case of the above exceptions, and where a court rules that the ABC test is inapplicable, the worker’s status would then be governed by S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. Under Borello, a worker’s classification is evaluated by several factors, the primary of which is a determination of the hiring entity’s right to control the work product. Additional Borello factors include:

(a) whether the one performing services is engaged in a distinct occupation or business; (b) 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; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.

Borello, 48 Cal. 3d at 351.

Simply put, the passage of AB 5 means that millions of Californian workers may need to be reclassified, and California businesses have little over three months to ensure that they are compliant, as the law becomes effective January 1, 2020. Where compliance is not met, AB 5 empowers the attorney general, city attorneys in cities with a population in excess of 750,000, and other local prosecutors to bring suit against companies over violations. Other California agencies, e.g., the Labor Commissioner’s Office, additionally continue to hold authority over individual worker misclassification cases.