Independent Contractor? Not in California!

A controversial bill passed by the California legislative assembly's preliminary vote on September 11, 2019, could reclassify millions of independent contractors as employees. Governor Gavin Newsom has already signaled his intent to sign AB 5.

The bill imposes sweeping amendments to the California Labor Code and the Unemployment Insurance Code. Most significantly, the bill expands and codifies the presumption that workers are “employees” and expressly adopts the “ABC” test for classifying independent contractors that the California Supreme Court articulated in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex). The bill would apply much more broadly than Dynamex, which limited the classification of independent contractors under wage orders of the Industrial Welfare Commission.

Currently, the control factors listed in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, are used to determine independent contractor status under other California labor laws. If the bill is signed into law, the ABC worker classification test would expand the classes of workers covered by the protections of many California labor laws, including those affecting:

• Overtime
• Minimum wage
• Employment discrimination and harassment
• Meal periods
• Rest periods
• Payroll deductions and contributions
• Workers’ compensation
• Unemployment insurance, including unemployment insurance taxes

Under the bill’s codified ABC test, a worker is an employee rather than an independent contractor unless the hiring entity demonstrates the following conditions:

1. (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
2. (B) The person performs work that is outside the usual course of the hiring entity’s business.
3. (C) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Although the bill would not automatically change workers’ status when it goes into effect on January 1, 2020, companies will need to evaluate their workforce and reclassify workers as appropriate. If, after January 1, an employer fails to appropriately classify workers, the employer faces potentially significant consequences from the various enforcement mechanisms included in the bill. In addition to claims from individual workers or through California’s Private Attorneys General Act, the California bill empowers the State Attorney General and certain city and district attorneys to seek injunctive relief on behalf of workers.

Entities that have relied on an independent contractor worker model are likely to feel the greatest impact from the new law. Although the bill carves out exemptions for approximately 50 job categories, many other industries that have relied on independent contractors as part of their business structure do not have an exemption, including those utilizing on-demand and gig workers, truck drivers, janitorial service workers and musicians.

Massachusetts, Connecticut and New Jersey, among other states, have also adopted variations on the ABC test. With this historic legislation in California, other states may not be far behind. Enforcement will undoubtedly be next phase of this fight. Employers should prepare to evaluate their independent contractor classifications and update independent contractor agreements, including revisiting arbitration and class action waiver provisions in light of this bill.