September 12, 2019

Governor Signs AB5 Into Law ⁠— Reshaping California’s Independent Contractor Classification Landscape

Today, Governor Gavin Newsom signed California Assembly Bill 5 (“AB5”), controversial legislation which will have a substantial impact on California employers when it goes into effect on January 1, 2020. 

AB5 enacts into a statute last year’s California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), and the Court’s three-part standard (the “ABC test”) for determining whether a worker may be classified as an employee or an independent contractor. 

Under the ABC test established in Dynamex and now under AB5, a worker may be properly considered an independent contractor only if the hiring entity establishes all three of the following: (A) that 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 the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.

While the Dynamex decision applied to workers in all industries, it only governed claims falling under a wage order, as opposed to claims brought solely under the Labor Code or Unemployment Insurance Code. AB5 expands the ABC test to non-wage order claims as well, and makes the test the standard for determining whether workers must be provided with minimum wages, overtime pay, workers’ compensation, unemployment and disability insurance, paid sick days, and family leave; because employees are entitled to these things, while independent contractors are not.

Due to intense lobbying prior to AB5’s ultimate passage, the law contains exemptions for numerous industries and positions, for example: doctors, dentists, psychologists, attorneys, architects, engineers, accountants, brokers, investment advisors, direct salespersons, private investigators, commercial fishermen, selected professional service providers that meet a series of specific requirements, real estate agents, estheticians, electrologists, barbers, cosmetologists, and many more. Exempted industries or positions will be subject to the longstanding multi-factor test for determining independent contractor vs. employee status as described in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989).

Importantly, however, AB5 does not include exemptions for many “gig economy” businesses, most notably in the ride-sharing space. This is certain to lead to continued and perhaps escalating disputes pertaining to the classification of workers in these gig economy positions. For example, Uber announced prior to AB5 even being signed by the Governor that its drivers “will not automatically be reclassified as employees, even after January of next year,” and that the company “will continue to respond to claims of misclassification in arbitration and in court as necessary, just as [the company] does now.” Other businesses may very well follow Uber’s lead over the coming months.

What Employers Should Know

Beginning in January 2020, businesses with workers not falling under one of the exemptions of AB5 will be at an increased risk of claims of misclassification. Businesses with independent contractors should evaluate whether those contractors are in positions that are subject to an exemption under AB5; and reevaluate their classifications of any workers not falling under an exemption to determine if those classifications are supportable under the ABC test. Businesses may also want to update arbitration provisions in independent contractor agreements to include express class action waivers in order to limit class or representative actions alleging misclassifications.