September 27, 2022

Volume XII, Number 270


September 26, 2022

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Landmark Bill Passes: California Codifies “ABC” Test for Worker Classification

On Thursday, September 12th, the California State Assembly passed Assembly Bill 5 (“AB 5”), the controversial new law that codifies the three-factor “ABC” test introduced by the California Supreme Court in its 2018 Dynamex decision. The passage of AB 5 marks a sea change in the way that companies doing business in California will be required to classify their workers.  AB 5 now goes to Governor Gavin Newsom’s desk for his signature, and Governor Newsom has previously committed to sign the bill into effect.

Effective January 1, 2020, AB 5 adopts Dynamex’s rigorous three-factor test for determining how a company may classify its workers. Under the so-called “ABC” test, which will be codified in Section 2750.3 of the California Labor Code, a worker will be considered an employee unless the company hiring the worker establishes all of the following three prongs:

(A) the worker is free from the control and direction of the company in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) the worker performs work that is outside of the “usual course” of the company’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business that is of the same nature as the type of work performed for the company.

Unlike Dynamex, which applied only to California Wage Orders (i.e., generally, minimum wage, overtime and meal and rest break liability), AB 5 is far more sweeping, and applies to California’s Wage Orders as well as the Labor Code and Unemployment Insurance Code. This means that, in the wake of AB 5, companies that are found to misclassify workers could face broader liability than they would have under Dynamex (including for unemployment insurance, various benefits, paid sick days, and state family leave).

Notably, while AB 5 specifically exempts certain industries, in its current form AB 5 does not include an specific exemption for “gig” economy companies.

To learn more about the California Supreme Court’s decision in Dynamex, listen to our podcast on The Proskauer Benefits Brief:  Legal Insight on Employee Benefits & Executive Compensation.

© 2022 Proskauer Rose LLP. National Law Review, Volume IX, Number 259

About this Author

Employment lawyer, Proskauer, Ekaterina (Kate) Napalkova
Special Employee Benefits and Executive Compensation Counsel

Kate Napalkova is a special employee benefits and executive compensation counsel in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Kate advises public and private companies, private investment funds, executives and boards on a broad range of compensation and employee benefits matters. Kate’s practice includes the compensation and employee benefits aspects of mergers and acquisitions, reorganizations, spin-offs, initial public offerings, financings and other corporate transactions. Kate’s practice further focuses on advising clients...

Katrine Magas Employee Benefits Attorney Proskauer Rose

Katrine Magas is an associate in the Tax Department and a member of the Employee Benefits & Executive Compensation Group. Katrine has extensive experience with executive compensation, equity compensation and tax-qualified plans, as well as compliance with Internal Revenue Code Sections 162(m), 280G and 409A. Before joining Proskauer, she worked in Ernst & Young’s People Advisory Services, Reward group, focusing on executive compensation and global equity matters arising in financial services organizations.

Following law school, Katrine served as a judicial law clerk for...