California Governor Gavin Newsom signed Assembly Bill 5 into law in September, which establishes a new approach to the use of independent contractors in business.
Newsom wrote that AB5 “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.”
The Bill, which received strong support in Sacramento, has vocal opposition from many companies like Uber, Lyft, and DoorDash that utilize independent contractors for their on-demand services. However, the law impact extends far beyond the gig economy and is likely to affect virtually all businesses in California.
Codifying the Dynamex “ABC Test”
The new legislation adopts the California Supreme Court’s opinion in Dynamex Operations West, Inc. v. Superior Court, The Court’s “ABC test” requires that an employer establish three factors to justify an independent contractor classification:
the worker is free from control and direction over the performance of the work, both under the contract and in fact;
the work provided is outside the usual course of the business for which the work is performed; and
the worker is customarily engaged in an independently established trade, occupation or business (hence the ABC standard).
If someone is classified as an employee, they are entitled to protections such as minimum wage, workers’ compensation if injured on the job, unemployment insurance, and paid leave. Misclassifying an employee as an independent contractor can result in fees and penalties, back taxes and other forms of liability.
Exemptions Under AB5
The new law includes exemptions to the test for certain fields and certain relationships, including the following professions: licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.
If an exemption applies, the old “Borello test” will apply, which focuses on whether a company has “control or the right to control the worker both as to the work done and the manner and means in which it is performed.”
Under AB5, “professional services” includes a wide range of services including marketing, human resources administration, travel agent services; graphic design; freelance writing, photography, and many others.
Finally, the bill includes additional miscellaneous exemptions that include real estate licensees, people in the construction industry, and individuals who operate as a sole proprietorship in a “business to business” relationship.
Many startups and emerging companies utilize independent contractors as they build prototypes, MVPs, and assemble a core team while getting the company off the ground. Now is the time for companies to review their independent contractor relationships to determine whether the can show that the law’s “ABC test” applies or if an exemption is valid, triggering the “Borello test.” Please contact us to learn more.
The full text of Assembly Bill No. 5
Guidance on independent contractor versus employee from the California Department of Industrial Relations
Governor Newsom’s Signing Statement
From the Los Angeles Times: Newsom signs bill rewriting California employment law, limiting use of independent contractors
Please note the foregoing is not intended to be an exhaustive summary of AB5 or the steps to be taken to become compliant and is not intended as legal advice. For customized recommendations and guidance concerning your independent contractor relationships, please contact us directly.