California Governor Passes AB5, Codifying Restrictions on Independent Contractors

On September 18, 2019, Governor Gavin Newsom signed into law, Assembly Bill 5 (“AB5”), codifying the landmark case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), which made it more difficult for employers to classify workers as independent contractors.

Dynamex, and now AB5, establish a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits arising under wage orders issued by the Industrial Welfare Commission. In addition, AB5 reaffirms the 3-part test of Dynamex, commonly known as the “ABC” test, to establish that a worker is an independent contractor.

Under the ABC Test, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that:

  • the person is free from the control and direction of the hiring entity in connection with the performance of the work,
  • the person performs work that is outside the usual course of the hiring entity’s business, and
  • the person is customarily engaged in an independently established trade, occupation, or business.

As discussed in previous blog posts, this makes it nearly impossible for a business to hire an independent contractor.

Retroactive Application

Although the bill does not take effect on January 1, 2020, the legislature stated that it “shall apply retroactively to existing claims and actions to the maximum extent permitted by law.” This means that there will be no forgiveness for employers who relied on the old standard when classifying independent contractors.

Exemptions

AB5 includes a number of occupations that would be exempt and, therefore, permitted to label certain workers as independent contractors. These exempt occupations would include, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

Controversies

In the bill, the legislature states that its passage was for social purposes. Specifically, AB5 states that “The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.”

Upon signing AB5, Governor Newsom wrote, “The hallowing out of our middle-class has been 40 years in the making, and the need to create lasting economic security for our workforce demands action. Assembly Bill 5 is an important step. A next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work – all while preserving flexibility and innovation.”

However, opponents of the bill claim that it will actually hurt the middle class by making it more difficult for workers to take side jobs in “gig” industries such as Uber, Lyft and DoorDash. This remains to be seen, but it will most certainly create a flourish of new lawsuits.

The controversy is far from over as three companies — Uber, Lyft and DoorDash — recently created a campaign committee with a $90-million contribution. Their intention is to present the issue to California voters in a 2020 ballot measure.

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Daniel Thompson is a civil litigation attorney practicing law in Temecula and Hemet, California. Davis & Wojcik APLC, a Southern California based law firm with offices located in Temecula and Hemet. Mr. Thompson can be reached at (951) 652-9000.