Before engaging independent contractors, learn how AB5 has impacted worker classification in California.
California’s worker classification landscape has been significantly altered by legislation and judicial judgments to make compliance easier for employers. These legal challenges and subsequent laws were intended to clarify the laws surrounding employee classification. However, they have merely added to the complexity of the situation. To safeguard themselves against worker misclassification suits and potential litigations, it will be important for businesses to understand the complicated nature of Assembly Bill 5 (AB5).
Effective January 1, 2020, AB5 has considerably changed the way California law distinguishes employees from independent contractors. The new law follows the 2018 California Supreme Court’s decision in Dynamex Operations West, Inc v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018) that set aside the longstanding classification standard focused on an entity’s control over the worker and, instead, adopted a rigid test to classify workers as independent contractors.
The “ABC” Test is the new standard for all independent contractor classifications. Codified by AB5, this test reclassifies all independent contractors as employees, which means that, until proven otherwise, these ‘employees’ are entitled to the same rights as all your other employees. An employer can only classify a worker as an independent contractor if they can demonstrate that every condition of the ABC test has been met:
■ The person is free from the control and direction of the hiring entity in the performance of the work.
■ The person performs work that is outside the usual course of the hiring entity’s business.
■ The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
What sets the ABC test apart from the original standard comes in the form of Parts B and C. These two new factors were never before part of California’s independent contractor analysis under the previous multifactor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989).
Recently, notable amendments have been added to Assembly Bill 5, making employee classification even more complex. Assembly Bill 2257 (AB2257), signed on September 4, 2020, amends certain sections of AB5, clarifying and adding new statutory exemptions on top of the existing ones—which apply retroactively where applicable. Under AB5, certain medical practitioners, licensed professionals, registered or licensed securities brokers, direct sales salespeople per the Unemployment Insurance Code, Section 650, and commercial fishermen working on an American vessel are exempt from the ABC test. In addition, since the ABC test is limited to the application of the Industrial Welfare Commission (IWC) Wage Orders, there are entire groups of workers where the ABC test does not apply. Now with AB2257, employers need to also consider the following exemptions: “bona fide business-to-business contracting relationships,” individual businesspersons who contract with one another “for purposes of providing services at the location of a single-engagement event,” and referral agency, professional services, and music industry and performer exemptions. Not only does this increase the difficulty of navigating the employee classification landscape but it also increases the number of potential misclassification suits.
The recent passage of Proposition 22 in November 2020 complicates the situation even more because it segregates gig workers from other independent contractors. It specifically reclassifies app-based drivers and companies as independent contractors and adopts labor and wage policies. Prop 22 institutes a minimum wage, provides mileage compensation, sets caps on work hours, prohibits discrimination and harassment, and requires companies to provide healthcare and accident insurance to drivers. However, it is important to note that they are generally not covered under the state’s labor laws. Prop 22 does not provide workers’ compensation, paid family leave, and unemployment insurance to these gig workers. So, it comes as no surprise that the Service Employees International Union (SEIU) recently sued the state government in the California Supreme Court and is now seeking a writ of mandate to invalidate Prop 22.
Employers must be careful when classifying workers as independent contractors. Misclassification can bring about serious liabilities in the form of civil penalties and additional wages, taxes, and fines. We recommend all California companies conduct an independent contractor analysis and enlist legal counsel to craft independent contractor agreements that clearly demonstrate that the worker meets the applicable standards to avoid potential litigation. If you need any assistance with an independent contractor analysis or crafting a legally compliant independent contractor agreement, contact Hackler Flynn & Associates.