California Lawmakers Redefining Employees and Independent Contractors

Last week the California legislature passed Assembly Bill 5 (AB-5) in an attempt to update and rework the landscape of California employment law.  The bill, which was passed by both the Assembly (56-15) and the Senate (29-11), is now in the hands of Governor Newsom, who has previously declared his support for the changes.

AB-5 focuses on the ever-crucial employment law distinction of workers as employees vs independent contractors.  Historically, by classifying workers as independent contractors, employers have been free from the restrictive burden of laws requiring the provision of benefits such as minimum wage, overtime pay, sick leave, workers’ compensation, and unemployment/disability insurance.  Author of AB-5 Lorena Gonzalez (D-San Diego) says the purpose of the bill is to not “allow free-riding businesses to continue to pass their own business costs on to taxpayers and workers.”

Moving forward, the test to determine whether an individual is an employee or an independent contractor, referred to as the “ABC” test, will be the one laid out by the California Supreme Court in the case Dynamex Operations W. v. Superior Court (2018).  In order to classify a worker as an independent contractor, the hiring entity must establish:

• 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;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• 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.

As explained by the California Supreme Court in Dynamex; “[this standard,] by expansively defining who is an employer, is intended to preclude a business from evading the prohibitions or responsibilities embodied in the relevant wage orders directly or indirectly—through indifference, negligence, intentional subterfuge, or misclassification.”

However, this new, broader definition of employees will not be applied to all occupations.  AB-5 specifically excludes these occupations from the new classification test: doctors, dentists, lawyers, engineers, accountants, architects, realtors, travel agents, graphic designers, human resources administrators, grant writers, marketers, fine artists, investment advisors and broker-dealers.

Perhaps the most prominent industry that will be affected by the new definition of employees is the app-based gig workforce of companies such as Lyft, Uber, and Doordash.  These companies have continued to fight the new bill, and will be exploring other options, including the creation of a separate class for their workers.

The full text of AB-5 can be found here: http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5