On September 18, 2019, California Governor Gavin Newsome signed into effect the much-anticipated AB-5 Bill, which imposes heightened standards when assessing whether to classify workers as independent contractors rather than employees. AB-5 will drastically affect California employers with workforces heavily reliant on independent contractors by forcing them to re-classify independent contractors as employees subject to most of the compliance requirements under California law, ranging from withholding laws for taxes and statutory benefits to wage and hour laws. AB-5’s statutory presumption of employee status will increase compliance costs and burdens and potentially force employers to alter their business models, or risk liability for costly misclassification lawsuits.

Before the Dynamex decision discussed below, the standard for determining independent contractor status was based on the degree of control exercised by the company in the relationship with the worker, based on several multi-factor tests. The stronger the principal’s control over the worker or the manner and means of performing the work, the more likely the worker would be classified as an employee. These tests also considered other secondary factors, such as the level of skill required, the details of payment, or the length of time for the services.

AB-5 codifies the California Supreme Court’s 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, which established a presumption of employee status, for purposes of applying the requirements of the California Wage Orders, and gave employers the burden to prove otherwise under the “ABC” test. Under that test, a worker is presumed to be an employee unless all three of the following conditions are met to properly classify as an independent contractor:

(A) The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(B) The service is performed outside the usual course of the business of the employer; and

(C) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

While the “A” and “C” factors are similar to pre-existing tests for independent contractor status, the “B” factor is expected to be particularly challenging.

AB-5 codifies this standard under the Wage Orders, but also extends it, retroactively, to the Labor Code, Unemployment Insurance Code, and Workers’ Compensation Code. AB-5 provides specific exceptions for several categories of occupations and relationships, such as doctors, licensed professionals, commercial fisherman, and estheticians. Gig economy, entertainment, and trucking industry workers are notably omitted as an exception. Importantly, the exempt occupations remain subject to the pre-existing multi-factor tests for independent contractor status, which are also difficult to satisfy.

California employers should assess and implement the appropriate changes to ensure compliance by reclassifying independent contractors to employees where appropriate. The presumption of employee status means that these workers are now presumptively subject to complex wage and hour requirements under California law (such as minimum wage, meal and rest breaks, overtime pay, reimbursement of business expenses, on-call or reporting time pay, and time-keeping and record-keeping); statutory employment benefits such as paid sick leave, disability benefits, unemployment insurance, workers’ compensation and, depending on the number of employees, health insurance benefits under the Affordable Care Act. These are just some of the issues employers are expected to face with the passing of AB-5.

AB-5 and its codification of the “ABC” test are not as easy as 1-2-3. California employers should consult with counsel to determine whether and to what extent AB-5 applies to their workforce, and assess their employment policies and practices to implement any necessary changes.