Employment Alert: California Enacts AB5: What This Means for Employers and Independent Contractors

Caution Tape

On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (AB5) into law. The new “gig” law will go into effect on January 1, 2020, and seeks to correct the alleged misclassification of over 1 million workers who have been deemed independent contractors by employers in California. A 2018 California Supreme Court case revised the standard by which workers should be classified as employees rather than as independent contractors (Dynamex Operations West, Inc. v. Superior Court of Los Angeles). Although AB5 attempts to clarify this standard and regulate companies like Uber and Lyft, it has instead created ambiguities that will need to be sorted out in the courts or by legislative amendments.  The law will have different impacts on various businesses, dependent upon the type of services those businesses provide.  

Under the new law, a worker will be classified as an “employee” rather than an “independent contractor” if his or her job constitutes part of a company’s core business, if the company determines how the work is to be performed or if the worker has not established an independent trade or business. Further, individuals who have been newly classified as employees will be eligible for benefits and pay guarantees (such as paid sick days, minimum wage, meal breaks) plus union membership.

There are several important considerations for a company to consider in determining whether a California worker is properly classified as an independent contractor or an employee.

What is the ABC test?

Under the ABC test, a hiring entity must prove the following in order to show that a worker is an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in regard to work performance, both contractually and in fact;
  2. The worker does work outside the normal scope of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business as the work performed for the hiring entity.

All three of these criteria must be satisfied for a worker to be classified as an independent contractor and employers will be under increased scrutiny in making their classifications. 

Who Is Exempt From Being Classified as an Employee?

There are specific exemptions to the AB5 contractor classification. Specifically, physicians, surgeons, lawyers, architects, engineers, licensed accountants, commercial fishermen, and veterinarians will retain the classification of independent contractors.

Certain professional services contracts are also exempt if they maintain a business location and negotiate their own rates. These services can include marketing, administering human resources, travel agent work, graphic design, art services, photography and freelance writing.

There are other specific exemptions that will apply if specific criteria are met, including a “business-to-business” exemption. Sole proprietors can qualify for this, but the exemption is limited to bona fide business-to-business relationships and must satisfy twelve criteria.

Are There Risks for Not Complying With the Law?

Yes. After AB5 goes into effect, independent contractor relationships will be even more heavily scrutinized. If an independent contractor relationship does not meet all three ABC standards, the relationship could be invalidated, which can result in exposure for the hiring entity.  This could mean a civil lawsuit by a disgruntled worker or former worker for misclassification and unpaid wages for overtime, meal periods, or rest time violations, or an audit and tax assessment by the California Employment Development Department, among other problems.   It is important that your company reviews all of its existing independent contractor relationships to ensure that an exception applies or that the three prongs of the ABC test are met.

How Will Violations of AB5 Be Processed?

AB5 is codified under the California Labor Code, so violations are actionable under the Labor Code Private Attorneys General Act. This means that workers who believe their positions meet the ABC standards can file lawsuits or complain to the Labor Commissioner.  In addition, the California Attorney General and certain City Attorneys will have the ability to bring claims on behalf of aggrieved workers. 

How Soon Do Businesses Need to Comply With the Law?

The effective date for AB5 is January 1, 2020, so it is important for businesses to seek guidance on compliance as soon as possible.

AB5 is subject to modifications as the legislature meets again. Industry groups are currently lobbying for more exemptions and major companies have already started strategizing on how to minimize the impact the law will have on their current independent contractor relationships. As with any new law, there will be ambiguities as businesses and the courts sort out the new classifications.

If you are a business owner, it is highly advised to seek legal counsel from an experienced labor and employment attorney to determine what impact AB5 will have on your business.  Please do not hesitate to contact Danielle G. Eanet at Eanet, PC ((310) 997-4185 or danielle@eanetpc.com) to discuss any of your concerns. 

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