California’s Assembly Bill 5 (“AB 5”) law codifies and expands the so-called “ABC” test applied in Dynamex Operations West, Inc. v. Superior Court of Los AngelesCounty regarding independent contractors. Under the ABC test, a worker is presumed an employee unless a hiring entity can show that the worker:
(A) is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract and in fact; and
(B) performs work that is outside the usual course of the hiring entity’s business, and
(C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Simply labeling a worker as an independent contractor, requiring them to sign an agreement stating they are an independent contractor, or being paid as an independent contractor (e.g., without payroll deductions) does not determine employment status.
AB 5 has carved out multiple exemptions for various industries and professions, such as subcontractors in the construction industry, lawyers, engineers, architects, accountants, and bona-fide business-to-business contracting relationships that exist between two business entities (e.g., LLC, corporation, partnership). Worker status in exempted professions and industries will not be determined by the ABC test, but will instead be subject to the multi-factor “Borello” test set forth in Borello & Sons, Inc. v. Dept. of Industrial Relations. Unlike the Borello test, where no single factor controls the determination of worker status, the inability of an employer to demonstrate any part of the ABC test means that the worker is not an independent contractor.
AB 5 is now in effect, which means that employers with California workers should already be evaluating current and future worker relationships under the ABC framework. Both past and future misclassifications can result in fines and penalties, wage claims, and lawsuits under California’s Wage Order, Labor Code, and Unemployment Insurance Code. Any necessary reclassifications of current workers should be made immediately. For future workers, employers should assess whether their current hiring procedures can lead to future worker misclassifications. Further, your legal counsel should have a strong grasp on AB 5 and closely monitor how California courts are applying the ABC test to different industries, professions, and scenarios. Court decisions will help employers better predict and prepare for the types of situations where an “independent contractor” is really an employee under the ABC test (i.e., what is the legal risk?).
As the worker status landscape continues to change, employers outside of California and those with national operations should be prepared for their own state’s version of AB 5. New Jersey, Oregon, New York, and Illinois have already made steps towards codifying their own version of the ABC test.
This article,"Can You Gig It? The Basics of California's New Independent Contractor Law," was published in the Bradley Construction and Procurement Law Newsletter for the first quarter of 2020.