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.