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Have Independent Contractors In California? You May Need To Rethink That.

On September 18, 2019, California Governor Gavin Newsom signed into law A.B. 5, codifying the “ABC test” adopted in the California Supreme Court decision, Dynamex (see, e.g. prior posts herehere, and here) and ensuring that most California workers should appropriately be classified as employees instead of independent contractors.  The bill goes into effect January 1, 2020.

Though supporters state that the bill is aimed primarily at the so-called “gig economy,” in reality A.B. 5 affects virtually every type of business in California.

Prior to Dynamex, courts used the Borello “economic realities test,” which allowed for more workers to be classified as “independent contractors.”  However, under Dynamex’s “ABC test,” any worker is considered an “employee” unless:

  • the worker is free from the hiring entity’s control regarding work performance;
  • the worker performs work outside the hiring entity’s usual course of business; and
  • the worker is engaged in an independent trade, occupation, or business of the same nature as the work performed.

Previous court rulings had limited the application of Dynamex to lawsuits alleging violations of Industrial Welfare Commission’s Wage Orders, including overtime requirements for non-exempt workers.  But A.B. 5 expands the scope of the Dynamex “ABC test” to all other provisions of the California Labor Code, as well as unemployment insurance claims.  A.B. 5 also empowers California prosecutors, including the Attorney General, to seek injunctions forcing employers to reclassify workers as “employees” consistent with the “ABC test.”

The law exempts certain industries and occupations, including certain medical professionals, lawyers, architects, engineers, private investigators, accountants, construction subcontractors, insurance agents, architects, barbers, cosmetologists, and securities broker-dealers.  The test for whether those workers will be considered “employees” will remain the Borello “economic realities test,” which focuses on whether the worker controls the manner and means of performing the work to be done.

Courts apply the Dynamex “ABC test” retroactively for Wage Order claims, meaning some employers may already be liable for, e.g. unpaid overtime.  But employers should reevaluate workers classified as “independent contractors” before the January 1, 2020 deadline to limit liability for other Labor Code violations.

International Trade Considerations

For those in international trade, the most immediate impact will be on truckers. The history is well-known. It took a decision of the U.S. Supreme Court in 2013 to overturn attempts by the City of Los Angeles to require actions on the part of trucking operators that, in effect, would have turned their drivers into employees. In that case, the Federal Aviation Administration Authorization Act of 1994 (FAAAA) was successfully invoked. The expectation is this new law will be subjected to a similar legal challenge on the same ground – the FAAAA gives the federal government, not the states, regulatory authority over interstate trucking.  Whether the lower court will suspend application of this new law pending conclusion of the legal process, remains to be seen.  If not, trucking operators will find themselves in the same position as many other companies. They will find they cannot meet the (b) requirement –  the workers are performing work which is part of the hiring entity’s usual course of business. That having been said, all companies should carefully review those on their books designated independent contractors. Will they continue to qualify as such, given this change in the law?

Tax Considerations

A.B. 5 also changes the definition of “employee” (to the ABC test articulated in Dynamex) for purposes of the California Unemployment Insurance Code (the “CUIC”).  This has important tax consequences.  The CUIC contains the income and employment tax withholding requirements that apply to compensation paid to employees who are providing services in California.  As a result, A.B. 5 may require employers in California to withhold (and remit) income and employment taxes with respect to compensation paid to workers who are deemed to be employees as a result of A.B. 5.  Employers could, therefore, find themselves in the unusual position of having to withhold California income and employment for workers (because they are employees pursuant to the ABC test) but not having to withhold federal income or employment taxes with respect to these same workers (because they may continue to be treated as independent contractors under federal law).  We anticipate that the California Employment Development Department will issue guidance in the near future as to how this somewhat bizarre situation should be handled.

© 2023 Mitchell Silberberg & Knupp LLPNational Law Review, Volume IX, Number 261

About this Author

Jeremy Mittman, Mitchell Silberberg Law Firm, Labor and Employment, Litigation Attorney, Los Angeles

Jeremy Mittman represents management in litigation of employment-related matters, including discrimination, harassment, and retaliation, as well as state and federal wage and hour claims. Jeremy regularly counsels clients on compliance with employment-related laws and on enforcing personnel policies and procedures. Jeremy has extensive experience representing employers in a variety of industries such as financial services, security services, and numerous entertainment and media companies. In addition, Jeremy works with clients on multi-country HR projects involving...

Jeffrey Davine

Legal Expertise

Jeff specializes in taxation, with an emphasis on tax controversy with the IRS, California Franchise Tax Board, California Employment Development Department, and other state and local taxing authorities. Representation of non-profit entities and charitable gift planning.

Representative Matters

  • Successfully represented numerous clients in disputes with the IRS and California Employment Development Department concerning the classification of workers as employees versus independent contractors.

  • Successfully represented a well...

Robert J. Lowe Partner Los angeles tax and trusts & estates nonprofit organizations employee benefits & executive compensation tax planning

All areas of employee benefits and executive compensation including: qualified and nonqualified retirement plans; group health plans; multi-employer pension and health plans; benefit plan issues in mergers and acquisitions; benefit plan investments in venture capital and real estate; equity incentive and nonqualified deferred compensation plans; benefit plans and executive compensation arrangements for employees of tax-exempt entities; income and estate tax planning for receipt of large distributions from retirement plans; negotiating and drafting executive employment agreements; use of...