California: AB 5 Cements the Dynamex Independent Contractor Test

In 2018, in Dynamex Operations West, Inc. v. Superior Court (Lee), the California Supreme Court set forth an ABC test for determining when an individual is an independent contractor rather than an employee for wage and hour-related claims. Specifically, the Court stated that a workers is presumed to be an employee unless the business proves: (A) the worker is free from control and direction of the hirer in connection with the performance of the work, based in contract and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) 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. The previous Borello standard was left in place for determining independent contractor status for non-wage and hour claims.

California recently enacted AB 5, which codifies the Dynamex ruling, and expands the ABC test to all claims, not just related to wage and hour issues. However, there are stated exemptions for licensed insurance brokers, physicians, surgeons, dentists, podiatrists, psychologists, veterinarians, attorneys, architects, engineers, private investigators, accountants, securities broker-dealers, investment advisers, direct sales persons, and commercial fisherman working on an American vessel. It also does not apply to contracts for “professional services” under certain circumstances, including marketing, human resources administration, travel agent services, graphic design, grant writer, fine artist, enrolled agents licensed by the U.S. Treasury to practice before the IRS, payment processing agent, photographer, freelance writer, esthetician, electrologist, manicurist, barber, cosmetologist, real estate licensee, and repossession agencies.  The bill states that where the ABC test is not applicable, the less rigid Borello standard will apply.

The bill also states that Dynamex does not apply to business-to-business contracts, construction subcontractor relationships, construction trucking services, referral agencies, and motor clubs, provided certain requirements are met. Additionally, employers are not permitted to reclassify individuals as independent contractors if they were classified as employees as of January 1, 2019.

The purpose of the bill is to ensure workers receive the basic rights and protections of employees, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave. The bill goes into effect generally on January 1, 2020, and will apply to workers’ compensation claims beginning July 1, 2020. The bill specifically states that it does not apply retroactively. Employers should get ahead of the curve and start evaluating independent contractor relationships before the bill goes into effect.

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