California Upends Independent Contractor Relationships with AB 5

With the recent passage of Assembly Bill 5 (AB 5), California has dramatically reshaped the relationship between independent contractors and their clients. An estimated 1 million Californians who are currently classified as independent contractors may be reclassified as employees under AB 5, beginning January 1, 2020. Businesses that have become accustomed to using lower-cost independent contractors to perform critical business functions will need to revisit these arrangements and make necessary operational and pricing adjustments to comply with the new rules.

AB 5 requires that the strict “ABC test” adopted by the California Supreme Court in the Dynamex case be used to determine whether most workers are considered employees of the hiring business or independent contractors. For certain specified occupations, the previous, more-flexible standard will continue to be used for making this determination. However, the law does not work in the other direction—employers are expressly prohibited from reclassifying individuals who were employees on January 1, 2019 to independent contractors based on the exemptions in AB 5.

The ABC Test:
Under the ABC test, a worker is presumed to be an employee of the hiring company unless all three of the following criteria are met:

1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for performance of the work and in fact; AND
   
   
2. The worker performs work that is outside the usual course of the hiring entity’s business; AND
   
   
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

If any one of these three prongs fails, the worker will be considered an employee of the hiring entity who is entitled to all of the protections provided by law, including minimum wage, overtime, workers’ compensation insurance, unemployment insurance benefits, anti-discrimination laws and more.

Exemptions from the ABC Test:
Intensive lobbying resulted in exemptions for dozens of occupations, including California-licensed doctors, psychologists, dentists, veterinarians, lawyers, architects, engineers, private investigators, accountants and real estate licensees; registered securities broker-dealers and financial advisers, certain direct salespersons, and others.  Most workers in the exempted occupations will remain covered by the more-flexible Borello multi-factor test used to determine whether the worker is an independent contractor or an employee.

Additionally, a “professional services” exemption was created under AB 5 to cover workers who meet certain specified criteria: marketing, human resources administration, travel agents, graphic designers, fine artists, enrolled agents, payment processing agents operating through independent sales organizations, still photographers and photojournalists, freelance writers, editors, and newspaper cartoonists; licensed hairdressers/cosmetologists, barbers, manicurists, estheticians, and electrologists.

Similarly, a new “business-to-business” exemption was created to cover bona fide business contracting relationships where a business service provider (not an individual worker) provides services directly to a contracting business, as opposed to customers of the contracting business.

Other specialty exemptions were also provided for commercial fishermen, service provider referral agencies (e.g., for home cleaning, dog grooming, tutoring, errands and similar consumer services), repossession agencies, motor clubs and certain construction subcontractors.

Finally, it is important to note that violations of AB 5’s rules relating to meal and rest breaks, minimum wages, and overtime pay will be given retroactive effect as of January 1, 2020—meaning that employers could potentially face four years of back liability for such claims, unless one of AB 5’s exemptions apply.

Although “gig economy” stalwarts like Uber, Lyft and Door Dash—who did not secure exemptions under AB 5—have announced plans to lobby for a November 2020 ballot initiative seeking to overturn AB 5, the dramatic expansion of the ABC test is a reality that California businesses must face for the time being. Accordingly, we advise all CA clients with active independent contractor relationships to evaluate their liability and make appropriate changes before January 1st.

For specific questions about independent contractor relationships under AB 5 or other California employment law issues, please feel free to contact Christy Kotowski at [email protected].

Christy Kotowski joined Outside GC’s California team as Senior Counsel in 2019. Based in San Francisco, Christy handles a broad range of complex workplace issues at the federal, state and local levels. Previously, she worked as in-house employment counsel for several large companies, and started her legal career in the Silicon Valley office of Morrison & Foerster, one of California’s oldest and largest law firms. She can be reached at [email protected] or 510-748-0930.