Employment law in California is dynamic and ever-changing. No greater example of this occurred when the California Legislature recently codified an expanding view of the employment relationship by passing Assembly Bill 5 (AB 5). This bill, signed into law by Governor Newsom, establishes by statute the “ABC” test as the method to determine whether workers are employees or independent contractors. This test was initially established in 2018 by the California Supreme Court.
AB 5, in large part, was enacted to protect against the misclassification of gig workers; however, it applies to all employers within the State.
Before the “ABC” Test
Prior to the adoption of the “ABC” test, the Borello test was used to determine employment classification. This multifactor test examines various factors and was established in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). The primary factors the Borello test analyzes include: (1) how much control the hiring entity can exercise; (2) whether the work formed a part of the usual business of the hiring entity; (3) the skill required for the work; (4) the duration of time for the services to be performed; (5) the method of payment; (6) who supplies the tools used to provide the services; (7) the worker’s opportunity for profit or loss; and (8) the permanence of the working relationship.
None of these factors are dispositive on their own, instead, courts were to evaluate all of the factors together to determine the employment classification. This multifactor test stood until the Dynamex decision last year.
Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018)
The California Supreme Court’s decision in 2018 changed the landscape for employment classification within the State. The Court moved away from the previous standard and adopted the “ABC” test to determine employment classification. Under this three-part test, a worker is an employee and not an independent contractor unless:
(a) they are free from the hiring entity’s control and direction in performing the work, both under the contract and in fact;
(b) they do work outside the hiring entity’s usual course of business; and
(c) they are customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
The second prong of the test became the most problematic for California employers because it generally required employers, who relied on independent contractors to perform duties falling within the usual course of their business, to reclassify those workers as employees. For example, medical professionals, such as nurses or doctors, found it more difficult to retain an independent contractor classification because they performed work that fell within the usual course of business for the hospital or medical clinic (i.e., providing healthcare).
This decision required employers to reevaluate their current worker classifications to ensure they complied with the Dynamex standard. Following the court’s decision, legislation to codify the standard was introduced in the California Legislature.
Assembly Bill 5
On September 18, 2019, Governor Newsom signed AB 5 into law, thereby codifying the “ABC” test. AB 5 extends application of the “ABC” test to the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission’s wage orders.
AB 5 defines an employee as “a person providing labor or services for [payment].” Additionally, AB 5 presumes a worker is an employee, unless the employer can establish independent contractor status by satisfying all three requirements of the “ABC” test. AB 5 does not change the elements of the “ABC” test established by the Dynamex decision.
Despite codifying the “ABC” test, AB 5 did not completely invalidate the Borello test. AB 5 states that certain occupations or positions are exempt from the “ABC” test and therefore governed by the Borello test. The exempt positions include: doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents.
Additionally, AB 5 provides the Borello test be used for workers who have contracts for “professional services” if they meet certain criteria. Under this exemption, the Borello test governs if: (a) the worker maintains a business location separate from the hiring entity; (b) the worker has a business license and any other required licenses for their profession; (c) the worker can set or negotiate their rates; (d) the worker can set their own hours; (e) the worker completes the same type of work with other hiring entities or potential customers; and (f) the worker exercises discretion and independent judgment in the course of performing their services. In addition, the professional services exemption only covers specified types of work, including: marketing, human resources, graphic design, and licensed barber or cosmetology services.
AB 5 will become effective on January 1, 2020.
AB 5 provides some clarification to the changing landscape of employment classification in California. Still, it forces employers who rely on independent contractors to reevaluate their staffing options. As a result, employers should review their current worker classifications to prevent or limit their potential liability in the case of misclassification.
The experienced attorneys at Palmer Kazanjian Wohl Hodson LLP are available to assist employers regarding the applicability of AB 5 to the operation of their business.