By Ross Boughton, Jack Schaedel, Dan Lyman

Firm: FordHarrison

A new bill passed in California will bring significant changes to the treatment of independent contractors, but it remains to be seen if it will result in gig economy workers in the state being converted to employee status.

Executive Summary

After months of debate and negotiations, the California State Legislature passed the controversial bill on independent contractor status known as ‘AB 5’ on Wednesday 11 September 2019. California Governor Gavin Newsom signed AB 5 into law on 18 September and it will go into effect on 1 January 2020. Tthe new law will impact and clarify the use of independent contractors throughout the state.

While the bill is being branded by much of the non-legal press as a bill that will mandate sweeping changes to the use of independent contractors in California, especially in the gig economy, its actual legal impact is far less clear.

Contrary to much of the reporting on the bill, AB 5 does not create a new independent contractor test or require that any specific company or industry convert workers from contractors to employees. Specifically, it does not explicitly convert gig economy workers from contractors to employees.

Rather, AB 5 applies codifies the existing ‘ABC Test’ established by the California Supreme Court last year in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (for more detail on Dynamex see here) to evaluate independent contractors under California’s Wage Orders and applies the same test on a broader scale.

The ABC Test

The ABC Test established in Dynamex presumes workers to be employees unless an employer can establish three factors:

  • the worker 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;
  • 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.

AB 5 also expands the application of the ABC Test beyond just the Wage Orders, applying it to the Labor Code and Unemployment Insurance Code.

Prior to AB 5, and after Dynamex, classifying a worker as an employee or independent contractor under provisions of these codes was arguably analysed under the more lenient ‘Borello Test’, and not under the ABC Test.

The Borello Test, as first set forth in S. G. Borello & Sons, c. v. Department of Industrial Relations (1989) 48 Cal.3d 341, looks to multiple factors to answer a principal question of whether the person receiving a service has the right to ‘control the manner and means’ of completing that service. Under AB 5, the ABC Test will uniformly govern the independent contractor/employee determination under the Labor Code, the Unemployment Insurance Code, and the Wage Orders for most industries.

Exemptions from the ABC Test

AB 5, however, does not apply the ABC Test across the board. The bill specifically exempts a number of occupations that will continue to be analysed under the Borello Test. These include: insurance brokers, accountants, securities broker-dealers, investment advisors, doctors, surgeons, dentists, podiatrists, psychologists, vets, attorneys, architects, engineers, commercial fisherman, persons engaged in direct sales, builders/contractors, and individuals providing professional services such as marketing, HR administration, travel agent services, graphic design, grant writing, fine art, freelance writers and photographers, barbers, cosmetologists, manicurists, aestheticians, electrologists, and tutors.

What about gig economy workers?

There has been significant media coverage over the fight for exemptions from gig economy companies. While the gig economy did not receive an exemption under the final version of the bill, it does not (as some coverage has implied) explicitly require gig economy workers to be classified as employees. In fact, considering that the bill’s primary effect is to codify the existing Dynamex decision, its immediate impact on the classification of workers may not be as universally widespread as some have predicted. With that said, the bill will drastically change the independent contractor/employee landscape in California.

Employers’ bottom line

Employers are strongly encouraged to review the classification of any independent contractors in California.