Recently, our firm issued an employment law update regarding the legislature’s passing of Assembly Bill [“AB”] 5 —a bill impacting employers who classify and use independent contractors. Referring to the bill as “landmark legislation,” Governor Newsom recently signed the bill into law, which becomes effective on January 1, 2020.

What the New Law Provides and How it Applies

In sum, the new law codifies the “ABC test” set forth in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903 [“Dynamex”], which sets forth a three-part test for determining whether a worker qualifies as an independent contractor. While there are exceptions, the new law provides that where the term “employee” is not otherwise defined, a person who provides labor or services for remuneration will be considered an employee and not an independent contractor unless all of the following three elements are satisfied:

A. the hiring entity can establish the person is free from the control and direction of the entity relating to the performance of the work;

B. the person performs work outside the usual course of the hiring entity’s business; and

C. the person is customarily engaged in an independently established trade, occupation or business.

Establishing element “A” will depend on the level of control the hiring entity has over the worker. The more control and direction provided to the worker, the more likely the worker will be classified as an employee and not an independent contractor.

Element “B” (the person performs work outside the usual course of the hiring entity’s business) can be more difficult to establish. Companies will need to evaluate what they consider to be their “usual course of business,” and whether a worker’s duties fall within that category such that the worker may be considered an employee.

Similarly, under element “C,” to establish that a worker is an independent contractor, the hiring entity must show that the worker is customarily engaged in an independently established trade, occupation, or business of a different nature than the work they are performing for the hiring entity. By way of example, the Court in Dynamex referred to workers traditionally fitting into this prong as plumbers and/or electricians retained to perform limited plumbing or electrical work for the hiring entity. However, workers hired to perform a function that is a normal part of a company’s business may be viewed as employees.

Potential Impact on Employers/Hiring Entities

The potential impact on businesses and organizations hiring entities who use independent contractors is far reaching, including, but not limited to, the following considerations:

  • While there are numerous exemptions under the new law, hiring entities will need to carefully consider whether existing workers are properly classified to avoid any potential misclassification claims, including the potential for class or representative action lawsuits;
  • Misclassification of a worker as an independent contractor could subject a hiring entity to civil penalties of $10,000 to $25,000 per misclassified worker, as well as liability for back wages, meal and rest break premiums, and additional other statutory and civil penalties;
  • Violations of the law are subject to potential prosecution by the Attorney General or City Attorney for injunctive relief to prevent the continued misclassification of workers;
  • Reclassification of independent contractors to employee status will increase costs to companies in the form of unemployment insurance, social security contributions, workers’ compensation insurance premiums, worker benefits, payroll taxes, retirement benefits, and various other categories.

What Hiring Entities Need to Do

If a hiring entity uses independent contractors, the hiring entity should carefully consider whether these workers properly meet the “ABC” test (or whether an exemption applies). Based on Governor Newsom’s message signing the law into effect, AB 5 is just a first step in more worker-friendly legislation to come, and hiring entities must take action to ensure they are in compliance.