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Has California Made Directors Employees?

On September 18, 2019, California Governor Gavin Newsom signed AB 5 into law effective January 1, 2020.  This legislation is intended to make it more likely that a worker will be classified as an employee.  It effects this change by codifying the California Supreme Court's endorsement of the so-called A-B-C test adopted in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018).  The Supreme Court's decision was limited to the context of California wage orders.  These impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.  Because AB 5 extends the application of the A-B-C test beyond the wage order context, it is expected to have an enormous impact on California businesses.  See California Law Provides New Test for Classifying Workers.

What about directors?

Labor Code Section 3351 is part of California's Workers Compensation Law.  It defines "employee" by providing a long list of persons who are employees.  Paragraph (c) adds to the list directors and officers of quasi-public and private corporations while rendering actual service for the corporations for pay", subject to specified exceptions.  See Is A Corporate Director An Employee Subject To Workers' Compensation?  AB 5 does not amend paragraph (c) but adds a new paragraph (i) to Section 3351 to include beginning July 1, 2020 "any individual who is an employee pursuant to [Labor Code] Section 2750.3".  The change is not retroactive. 

AB 5 codifies and extends the A-B-C test in new Section 2750.3.  Under the A-B-C test, a person who provides labor or services for remuneration will 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.

In many cases, directors will receive fees from the corporation for their services.  Corporations most likely will be able to satisfy A because the directors control the corporation and not vice versa.  Establishing B & C may, however, prove to be challenging for some corporations as many directors are retired and/or involved in other trades, occupations or businesses of a different nature. 

Note to readers:  AB 5 is complex with numerous exceptions.  The foregoing should not be relied upon as a complete summary of the legislation and its many intricacies. 

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...