Question:  I read your newsletter about the court case involving independent contractors, but now I’m hearing about a new rule regarding worker classification.  What’s the status?

Answer:  On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill (AB) 5 codifying the stringent three-part “ABC” test that was set forth by the California Supreme Court last year in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex) to evaluate whether a worker is correctly classified as an independent contractor.

Historically, in determining whether a worker was an employee or an independent contractor, California courts, the Labor Commissioner, Internal Revenue Service, and the Employment Development Department used the eleven-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (Borello). The Borello test primarily focuses on whether a business has control over the means and manner of performing contracted work, while considering additional secondary factors such as the method of payment, the length of time the services are to be performed, and who provides work tools.

In Dynamex, the California Supreme Court adopted a new test for determining whether a worker is properly classified as an independent contractor as opposed to an employee.  The Dynamex “ABC Test” presumptively considers all workers to be employees for purposes of Wage Order claims unless the employer can prove that the worker satisfies the following three conditions:

(A) the worker 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 worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business.

Under Dynamex, failure to satisfy any one of these three elements means that a worker must be classified as an employee for purposes of the California Wage Orders (e.g., claims for minimum wage, overtime, etc.).  Under AB 5, the Dynamex  test applies not only for purposes of the California Wage Orders, but also for all Labor Code and Unemployment Insurance Code claims, meaning that now the “ABC Test” will apply to additional claims to which it previously did not apply.

Notably, due to extensive lobbying efforts during its drafting, AB 5 contains numerous exemptions from the Dynamex test for particular occupations and relationships.  Subject to certain licensing and other requirements, the following occupations are subject to the Borello test instead of the Dynamex test:

  • Doctors (physicians, surgeons, dentists, podiatrists, veterinarians, psychologists)
  • Professionals (lawyers, architects, engineers)
  • Professional service providers (marketing, human resources administrator, travel agents, graphic designers, grant writers, fine artist)
  • Financial services (accountants, securities broker-dealers, investment advisors)
  • Insurance brokers
  • Real estate agents
  • Direct sales (compensation must be based on actual sales)
  • Builders and contractors
  • Freelance writers and photographers (no more than 35 submissions to an outlet in a year)
  • Hair stylists and barbers (must be licensed, set own rates and schedule)
  • Estheticians, electrologists, and manicurists (if licensed)
  • Tutors (that teach their own curriculum, and that are not public school tutors)
  • Commercial fishermen
  • AAA-affiliated tow truck drivers.

AB 5 is very complex and the risks of misclassification are significant and can include back taxes owed to the federal and state government, as well as unpaid overtime and missed meal and rest period penalties.  If you use independent contractors, be sure to analyze their classification under AB 5, which can be viewed at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5