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California Legislature Passes New Bill Affecting Independent Contractor Classification

| Sep 13, 2019 | Publications |

By: Huy M. Tran and Kerri N. Polizzi

On Wednesday, September 11, 2019, the California legislature passed a landmark bill known as Assembly Bill 5 (AB-5) that will reshape many companies’ ability to classify workers as independent contractor. Most notably, the bill directly targets Uber and Lyft’s classification of their drivers. AB-5 is now en route to the desk of Governor Newsome, whose signature would solidify the new law.

On September 2, 2019, Governor Newsom emphasized that reversing the trend of misclassification is a necessary and important step to improve the lives of working people. With that being said, Governor Newsom noted that he is “proud to be supporting Assembly Bill 5, which extends critical labor projections to more workers by curbing misclassification.” As such, it is expected that Governor Newsome will sign AB-5 into law.

AB-5 Intended to Codify Dynamex ABC Test

AB-5 expands a groundbreaking 2018 California Supreme Court decision in Dynamex Operations West, Inc., v. Superior Court (2018) 4 Cal.5th 903. As explained in our prior article [/blog/2018/05/california-supreme-court-adopts-abc-test-and-makes-it-more-difficult-to-classify-workers-as-independ.shtml], the “ABC Test” is used to determine whether a worker is an employee or independent contractor. For an employer to establish that its worker is a true independent contractor, the employer must prove ALL of the following:

(a) the worker is free from control and direction of the hirer in connection with the performance of the work both under the contract for the performance of such work;

(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(c) 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.

Dynamex limited the “ABC Test,” to California’s Industrial Welfare Commission Wage Orders. However, AB-5 would codify the Dynamex “ABC Test,” expanding its application to all provisions of the Labor Code, the Unemployment Insurance Code, and Wage Orders. Once enacted, this bill will implicate employers throughout California, exposing them to substantial liability and, in many instances, costly litigation.

However, the bill would exempt specified occupations from the application of Dynamex, and would instead provide that these occupations are governed by the multifactor common law test established in S.G. Borello & Son’s, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. 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.

The After-Effects of AB-5 and Dynamex

On May 2, 2019, in Vazquez v. Jan-Pro Franchising Int’l, the Ninth Circuit Court held that Dynamex applies retroactively, and that it was consist with due process. As such, many employers continue to be at risk of being exposed to litigation for past classification decisions. Not surprisingly, AB-5 is consistent with the Vazquez decision. The bill specifically states that “the specified Labor Code provisions of the bill apply retroactively to existing claims and actions to the maximum extent permitted by law while other provisions apply to work performed on or after January 1, 2020.” Essentially, AB-5 will apply to current actions and potential claims for which employers were already exposed to liability.

So, how will all of this affect employers and employees? Only time will tell. Kring & Chung, LLP will continue to monitor the developments of AB-5.

Kring & Chung, LLP is hybrid firm who represents employees and employers. For employees who believe that they are misclassified and owed overtime wages and meal and rest breaks, contact Associate Attorney Huy M. Tran. He can be reached at (949) 261-7700 or via email at [email protected] For employers who are interested in an evaluation for existing classifications and potential liabilities, contact Associate Attorney Kerri N. Polizzi. She can be reached at (949) 261-7700 or via email at [email protected]

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