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California Bill AB5 Will Rewrite the Rules for Independent Contractors

On September 10, 2019, the California Senate passed AB5, a sweeping bill to control the use of independent contractors in the nation’s largest state.  With the California Assembly concurring in the Senate’s amendments to the bill on September 11, 2019, the legislation now proceeds to Governor Gavin Newsom who is expected to sign it into law.

AB5 codifies the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, and adopts an “ABC” test to determine whether a worker is classified as an “employee” for purposes of California’s Labor Code, unemployment insurance law, and wage orders.  Under the “ABC” test, for a worker properly to be classified as an independent contractor, the putative employer must satisfy three conditions:

  • The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;

  • The work being performed is outside the usual course of the employer’s business; and

  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The bill contains numerous exceptions for occupations and contracting arrangements that will not be subject to the ABC test under either AB5 or Dynamex.  Certain professionals, including lawyers, doctors, engineers, accountants, investment advisors, insurance brokers, and others, will continue be governed by the pre-Dynamex common law standard.  Independent contractors providing certain types of services (including, marketing, human resources, design, photography, writing, and editing) will not be subject to the ABC test if they meet a separate, six-factor test focusing largely on whether they operate an independent business.  Construction subcontractors and bona fide business-to-business contracting relationships are also exempted from the ABC test. 

Although AB5 states that it applies only prospectively to work performed after January 1, 2020, it is an open question whether the Dynamex ruling will be applied retroactively.  The U.S. Court of Appeals for the Ninth Circuit previously ruled that it did, but then vacated that ruling and certified the issue to the California Supreme Court, which has not decided the issue.  AB5 is not helpful to employers on this point, providing that its test “does not constitute a change in, but is declaratory of, existing law.” 

It is anticipated that Governor Newsom will sign the bill, though he has stated he will continue to negotiate with major California gig economy employers about its scope.  If passed, the bill will upend numerous independent contractor relationships in the state and subject businesses that retain independent contractors to a patchwork of local minimum wage laws (21 in the Bay Area alone), meal and rest break requirements that are difficult for employers to police, and the requirement to provide wage statements containing nearly a dozen categories of information.  Businesses in California that use independent contractors should immediately begin working with counsel to plan for AB5’s January 1, 2020 effective date by either ensuring that existing contractor relationships pass the ABC test or meet the requirements of one of AB5’s exceptions and/or preparing to transition certain contractors to W-2 employment status.

© Polsinelli PC, Polsinelli LLP in California

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About this Author

Conne Bertram Government Contract Lawyer Polsinelli Law Firm
Shareholder

Connie focuses her practice on whistleblower, trade secrets, government contractors and employee mobility counseling and litigation. She frequently conducts confidential internal investigations involving executive-level employees, including alleged fraud, theft or misuse of company data, trade secrets, sexual harassment and code of conduct violations. She routinely counsels, investigates and litigates restrictive covenant and trade secrets disputes between employers and former employees.

Connie has defended complex whistleblower, trade secrets and restrictive...

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Associate

Jack Blum is an associate in the firm’s Employment Disputes, Litigation, and Arbitration practice, where he represents employers in connection with a wide range of employment law issues. Jack has extensive experience in defending employers against claims by their employees in federal and state courts, as well as before government agencies like the EEOC, Department of Labor, and state human rights commissions. Jack aggressively defends his client’s personnel practices and decisions while not losing sight of their underlying business goals and objectives. Jack represents clients in all aspects of complex employment litigation and has advised and defended employer clients regarding a wide variety of employee claims, including:

• Employment discrimination, harassment, and retaliation
• Wage and hour
• Employment contract disputes
• Independent contractor/employee misclassification audits 
• Tort claims arising out of the employment relationship

Jack also has extensive experience representing parties in litigation arising from employee mobility, including claims involving non-competition, non-solicitation, and confidentiality agreements as well as the misappropriation of trade secrets. Significantly, Jack has experience in both prosecuting and defending these claims and is, therefore, able to offer clients a well-rounded assessment of their options and courses of action. Jack also has experience redressing employee data breaches under the Computer Fraud and Abuse Act.

Jack also has a background in employment counseling, where he has worked closely with in-house counsel, human resources personnel, and business executives to craft personnel policies that meet the client’s business requirements while complying with applicable laws. Jack has particular experience in assisting clients with issues relating to employee/independent contractor classifications, and regularly advises clients regarding the defensibility of classifications, drafts independent contractor agreements to provide the strongest possible arguments in support of the classification, and defends misclassification claims asserted by employees and government agencies. Jack also walks clients through sensitive personnel actions to reduce the potential for litigation or at least best position the client in the event that litigation is inevitable. Jack draws heavily upon this counseling experience in representing clients in litigation.

During law school, Jack served as a legal intern in the U.S. Securities and Exchange Commission’s Office of the Inspector General where he contributed to several high-profile internal investigations, and also interned with the Maryland Attorney General’s Office.

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