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California Passes Sweeping New Law Limiting Employer Use Of Independent Contractors (US)

AB 5, and its “ABC test,” expected to have greatest impact in “gig economy” jobs, but impact certain to be even more widely felt

After a summer of lobbying and debating, the California Assembly adopted AB 5, a headline-grabbing law purporting to transform the status of gig-economy workers at companies like Uber, Lyft, and DoorDash.  Proponents of the law assert that it will force those companies to treat those persons performing work as independent contractors like employees, with all of the legal protections that entails – minimum wage, overtime, workers’ compensation, paid sick leave and reimbursement of expenses just to name several.  Critics at companies like Uber are publicly declaring they do not believe it will change their relationship with gig workers while they are reportedly meeting behind closed doors with California Governor Gavin Newsom, who has stated he is still open to negotiating possible changes to the law before he signs it.  Meanwhile, spokespeople for groups representing small employers as diverse as family vineyards and synagogues are expressing concern about the impact of this law on them.  So what does it really mean?

AB 5 codifies the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal. 5th 903.  Specifically, the new law, if signed by the Governor (as is expected), puts the burden on hiring entities to demonstrate that independent contractors are, in fact:

  • (A) free from the control and direction of the hiring entity in fact as well as by contract;
  • (B) the work performed by the person is outside the usual course of the hiring entity’s business; and
  • (C) the person hired is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Arguably, Dynamex is already the law of the State of California.  AB 5 removes any doubt that the so-called “ABC test” now broadly applies across the State.  Further, AB 5 will permit cities and counties, as well as the State Attorney General and disgruntled employees to sue for injunctions.  Even though AB 5 has not even been signed by Governor Newsom, Uber has already been sued under it.

AB 5 is not all bad news for employers.  Many industry groups, rattled by the implications of Dynamex, did succeed in securing exemptions for specific categories of workers traditionally treated as independent contractors.  These exemptions include (i) individuals licensed by the Department of Insurance; (ii) real estate licensees; (iii) physicians, surgeons, dentists, podiatrists, psychologists and veterinarians licensed by the State; (iv) licensed lawyers, architects, engineers, private investigators and accountants; (v) securities broker-dealers and investment advisors and their agents/representatives registered with the SEC or FIRA or licensed by the State; (vi) direct salespersons who otherwise meet Unemployment Code conditions;  and (vii) certain commercial fishermen.

Entities using independent contractors in areas such as marketing, human resources, graphic design, and freelance photography, writing, and editing may apply a friendlier six-part test requiring independent contractors:

  1. Maintain a separate business location (which can be their home);
  2. Have a business license in addition to any required professional licenses;
  3. Have the ability to set or negotiate their own rates;
  4. Set their own hours (other than project completion deadlines)
  5. Customarily engage in the same kind of work with another entity or holds themselves out to other potential customers for the same kind of work; and
  6. Customarily and regularly exercises discretion and independent judgment in the work.

AB 5 also includes special rules for business-to-business contracts, subcontractors in the construction industry, and referral agencies.  To the extent that these exemptions would relieve an employer from liability it otherwise would have had under Dynamex, the exemptions apply retroactively.

In short, there is a lot in the new law and every employer using independent contractors in California should look at it closely to make sure they understand the basic requirements of the ABC test and whether there is a better test available under one of the exceptions.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume IX, Number 259


About this Author

Michael Kelly, Squire Patton Boggs Law Firm, Employment Attorney

Michael Kelly has experience in employment litigation, counseling, collective bargaining and arbitration. His practice includes state and federal employment litigation regarding wage and hour issues, age and disability discrimination, sexual harassment and retaliation.