On September 18, 2019, California Governor Gavin Newsom signed into law Assembly Bill 5 (“AB-5”). AB-5 codifies the ABC test set forth by the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018) and expanded its applicability. It expands the ABC test for independent contractor vs. employee classification to the California Labor Code and the California Unemployment Insurance Code.

  1. What is it? The Dynamex decision adopted the so-called 3-part “ABC” test for determining whether an individual is considered an independent contractor or an employee under the wage orders, which govern many aspects of wages and working conditions in covered industries. Under the ABC test, a worker is presumed to be an employee unless a hiring company can satisfy all three “prongs” by establishing that:
  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
  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.

AB-5 codifies and expands the Dynamex ABC test, making it apply not only to claims arising out of the wage orders, but also to the California Labor Code and Unemployment Insurance Code.

  1. What Are The New Carve Outs: AB-5 includes carveout exemptions from the ABC test for various occupations and business relationships (such as lawyers, doctors, engineers, veterinarians, commercial fisherman, real estate agents, cosmetologists, investment advisors, insurance brokers, licensed private investigators and specified professional service providers) if the hiring entity can prove the specific requirements for exemption are met. See California Labor Code section 2750.3(b)-(h). If the exemption applies, the Borello test governs the worker classification issue.

The application of the ABC test to the California Labor Code and Unemployment Insurance Code takes effect on January 1, 2020, with the applicability to workers’ compensation going into effect on July 1, 2020.

Under AB-5, the number of individuals who are considered employees in California for purposes of the wage orders, California Labor Code, and Unemployment Insurance Code will increase substantially. We are recommending to all our clients and readers of this blog to meet with their employment counsel and to do an audit of the work force to mitigate risk. For most business owners, an employment attorney will make recommendations about how to be compliant and protect your business. For those DIY fans, conducting your own audit is very risky. We do not recommend it.

Garcia & Gurney, ALC legal articles should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of these articles are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.