With the New Year Comes Reclassification Under AB5 - California’ s AB5 Explained
By Ashley A. Richardson, Of Counsel
March 19, 2020
The New Year brought with it a big shock for California’s independent contractor industry. On September 18, 2019, Governor Gavin Newsom signed into law Assembly Bill 5 (AB5), which has the ability to reclassify thousands of independent contractors as employees in the State of California. With the stroke of pen, the landscape of independent workforces in California may, and will likely, dramatically change. Who does AB5 apply to? If you are an independent contractor or a business owner/employer in California who engages with independent contractors for various services, then AB5 applies to you. You should pay close attention.
What is AB5 and How Will AB5 Affect Me?
For background, the California Supreme Court decided in April 2018 that a new test will be used to determine whether a worker is an independent contractor or employee. The now infamous Dynamex Operations West, Inc. decision only applied in limited circumstances – namely wage-order claims. However, AB5 made the Dynamex decision a statutory law and expanded it to all claims under state Labor and Unemployment Insurance codes. This is a major concern, as a violation of AB5 could result in hefty penalties for your business.
So what constitutes an independent contractor in California? Under the new ABC Test, a worker is first considered to be an employee. If you would like the worker to be instead classified as an independent contractor, you, as the hiring company, then has the burden of proving that the worker satisfies all three conditions of the ABC Test. A worker can only be categorized as an independent contractor if:
The worker is free from your control and direction in the performance of services; and
The worker is performing work outside the usual course of your business; and
The worker is customarily engaged in an independently established trade, occupation, or business separate from your business.
Previously, whether a worker was considered an independent contractor was based on the more flexible Borello test. The new ABC test is much narrower. Many businesses and independent contractors who want to keep the independent contractor relationship and status are already finding it difficult to meet these strict requirements.
What about Those Hefty Penalties?
Individual claims to California agencies that oversee worker classification issues can result in audits of your companies’ employment practices. This may result in substantial penalties relating to improper classification of an employee – including meal and rest break, overtime, recording violations, and more. Further, AB5 enables the California attorney general, city attorneys, and local prosecutors to sue companies over violations. Importantly, AB5 may also allow for retroactive effect, within the applicable statute of limitations, for claims of violations of the Labor Code relating to wage orders, such as those mentioned above.
Are there Exemptions under AB5?
There are some industry exemptions under AB5. These include doctors, dentists, insurance agents, lawyers, accounts, real estate agents, hairstylists, and a variety of creative professionals. AB5 also exempts business-to-business contractors and referral agencies that meet approximately a dozen specific requirements under the law. Additionally, even if a worker does not qualify as an independent contractor under AB5, he or she would still need to meet the qualifications under the former Borello test.
A Call to Action
So what should your business do as a result of this law? Evaluate your independent contractor management processes. Review engagement guidelines, independent contractor contractual terms, documentation processes, work structure, independent contractor interactions, and level of control. Make sure to establish a true business-to-business relationship with independent contractors by creating separation. Be deliberate in your business strategy to achieve and maintain compliance. Additionally, hire legal counsel with experience and knowledge with AB5 to assist you in determining whether someone is an employee or an independent contractor.
Alternatively, you can use the Independent Contractor Assessment Tool (ICAT). We created ICAT to help business owners assess whether their worker is an independent contractor. Click the link above to learn more.
Independent contractors in other states should also be vigilant. AB5 creates the possibility that other states will enact similar laws that make it ever more difficult to classify workers as independent contractors.
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DISCLAIMER: The contents of this article represent the opinions of the author and do not constitute as legal advice. Due to the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without consulting with an attorney. Neither this article nor any legal analysis, legislative updates, or other content derived from it should be construed as legal or professional advice or as a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of this article. The choice of a lawyer or other professional is an important decision and should not be based solely upon this article. No representations are made as to the accuracy, completeness, or validity of any information contained herein.
Contact the Law Office of George R. Bravo to find out how any information here applies to your particular circumstances.