On September 18, 2019, California Governor Gavin Newsom signed California’s Assembly Bill 5 (“AB 5”). This landmark bill takes effect on January 1, 2020, and will require gig economy workers to be reclassified as employees instead of independent contractors. As it relates to the construction industry, AB 5 provides that the “relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry” shall be governed by pre-existing law, provided that the contractor satisfies seven new criteria set forth in AB 5. AB 5 also includes an exception for certain construction trucking services performed prior to January 1, 2022, as well as active California licensed architects and engineers.
Despite these construction-related exceptions, the construction industry is still well-advised to familiarize itself with AB 5, due to the new criteria that must be demonstrated by contractors to ensure application of pre-existing law to its subcontractor relationships, as well as its potential impact on other construction contracting relationships. It is also quite likely that there will be litigation over AB 5 and there is already talk of further amendments to the bill, despite the fact that it has yet to go into effect.
Dynamex and AB 5
AB 5 is the legislative response to the California Supreme Court’s April 30, 2018, decision in Dynamex v. Superior Court. AB 5, which has been referred to as either a boon for workers or a job killer, depending on one’s point of view, imposes a new framework known as the “ABC” test to determine whether a worker is an employee or an independent contractor. Additionally, AB 5 expands Dynamex by making the “ABC” test applicable to all Labor Code, Unemployment Insurance Code, and Wage Order claims as opposed to just Wage Order claims.
Applying the same language as Dynamex, AB 5 provides that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor, unless the hiring entity demonstrates all of the following conditions:
- The person 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 person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Dynamex and AB 5 upend the almost 30-year-old test adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. As noted, AB 5 includes exceptions for a number of occupations and relationships which, for the most part, will continue to be governed by Borello (provided any other factors or criteria enumerated in AB 5 are satisfied).
Borello (pre-Dynamax) and Cal. Labor Code 2750.5
The Borello test, in conjunction with Cal. Labor Code 2750.5 are, and will likely remain, the primary means to determine whether a worker is an employee or independent contractor in a relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry provided the contractor can demonstrate the new criteria are satisfied.
The Borello test focuses primarily on control—whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired”—as well as additional factors to determine whether a worker is an employee or independent contractor. As the Borello test has been used in California for almost 30 years, there are numerous decisions, opinions, and interpretations of its application.
Cal. Labor Code 2750.5 provides that, in addition to the other factors listed in the Code, “any person performing any function or activity for which a [contractor’s] license is required pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code shall hold a valid contractors’ license as a condition of having independent contractor status.” The California Contractors State License Board regulates contractors in 44 different classifications covering everything from earthwork and paving to painting and decorating.
Construction Subcontractor Exception
AB 5 provides that the holding in Dynamex does not apply to the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry. Instead, the determination of whether the individual is an employee of the contractor shall be governed by Cal. Labor Code 2750.5 and by Borello, if the contractor satisfies all the following criteria:
- The subcontract is in writing.
- The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
- If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
- The subcontractor maintains a business location that is separate from the business or work location of the contractor.
- The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
- The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
- The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
It has yet to be seen how contractors will, in practice, manage to fulfill the criteria established by this rule. It is also unclear what liability a contractor might incur in the event of non-compliance, or should a there be a change in criteria. These issues, among others, will likely not be resolved until AB 5 is applied in real-world situations. Until then, those in the construction industry in California are advised to ensure their workers are properly classified. We will continue to provide updates as they become available.