Independent Contractor

In September of 2019, California Governor Gavin Newsom signed Assembly Bill (AB) 5 into law. The new law addresses the status of workers when their employers claim they are independent contractors and not employees.

What does AB 5 do?

AB 5 is a bill signed into law in September 2019 that addresses employment status when a hiring entity claims that the person it hired is an independent contractor. In order to determine if a worker in California is an employee or independent contractor for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders, employers must apply the “ABC test” as established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. The state legislature also passed two other bills addressing these issues (sections 2775-2787 of the Labor Code), which were later amended by AB 2257.

What is the ABC test?

Under the ABC test, a worker is considered an employee and not an independent contractor, unless the employer meets all three (3) of the following conditions:

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

AB 5 Exemptions

AB5 excludes certain occupations from its reach. Physicians with licenses, dentists, psychologists, veterinarians, lawyers, architects and engineers are exempt from the bill; as are accountants, real estate licensees and securities broker-dealers; marketing and human resources professionals; and manicurists and barbers who meet certain conditions—including setting their own rates.

AB5 exempts certain business-to-business contractors and referral agencies from the requirements of the state labor code. However, these exemptions require a careful strategy to remain compliant with all of the various requirements.

If a worker is exempt under AB5, they must still be evaluated under the flexible multi-factor test outlined by the California Supreme Court in the 1989 case of S. G. Borello & Sons, Inc. v. Department of Industrial Relations. No one factor is dispositive, so structuring and documenting an independent contractor arrangement to comply with AB5’s requirements is crucial for employers and businesses.

AB5 has affected businesses in California. Business owners must examine their independent contractor relationships through the AB5 framework. They must satisfy the Dynamex ABC test (or the Borello test if they are in an exempted occupation). Otherwise, they face an increased risk of defending against additional claims from workers claiming to be employees, class-action suits brought on by attorneys representing workers on a class or collective basis, and city and state authorities.