As many of you may have heard, the California Legislature has passed a major piece of legislation regarding independent contractors. Assembly Bill 5, passed on September 10, would drastically limit companies’ ability to use independent contractors in California, particularly those in the “gig economy.” Gov. Gavin Newsom (D) is expected to sign the bill and, with limited exceptions, AB 5 would apply to work performed on or after January 1, 2020.

Assuming the bill becomes law, the presumption will be that a worker is an employee unless the hiring entity can meet certain criteria. The standard will be difficult for many companies to meet.

AB 5 would codify the “ABC test” into the California Labor Code and Unemployment Code. The test derives from the California Supreme Court case Dynamex Operations West, Inc. v. Superior Court of Los Angeles.

The bill would add a new section to the California Labor Code, saying that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) 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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

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

Satisfying “prong B” will be especially difficult for many companies. If a company is using independent contractors to perform work that can be considered part of that company’s “usual course” of business, even if the company’s control over the individual's work is limited, the law would presume the worker is an employee and not an independent contractor.

The bill makes some very limited exceptions for certain workers – including lawyers, physicians, accountants, and licensed manicurists and barbers. For these workers, a more lenient multi-factor test from S.G. Borello & Sons, Inc. v. Department of Industrial Relations would apply.

AB 5 would also amend Section 621 of the Unemployment Insurance Code to define “employee” using the new “ABC test.” This means that the Employment Development Department would no longer rely on the more lenient Borello test to determine whether a worker was an “employee” and therefore eligible for unemployment insurance benefits. The new law may lead to an increase in EDD audits of companies’ classification practices, which could lead to substantial legal exposure if workers are not properly classified.

California businesses should review and revise their policies and practices with respect to classifying workers so that they align with the new law. Any ambiguities are likely to be construed in favor of classifying the worker as an “employee.” Even a seemingly innocuous mistake could be costly for businesses.