AB 5 Becomes Law: California Limits the use of Independent Contractors by Employers

From JDSupra, Kelly Scott reports that California’s AB5 was signed by the governor and provides a terrific summary of the bill. Kelly writes:

On September 18, 2019, Governor Newsom signed Assembly Bill 5, thereby establishing a law that purports to prevent the misclassification of employees as independent contractors and provide “basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” California businesses and employers would argue that AB 5 appears to be nothing more than shameless effort to collect more payroll taxes by prohibiting a wide variety of independent contractor relationships and, as a result of the lobbying efforts of trade unions and various industries, is a confusing mess of tests, rules and exceptions which will serve as a basis for litigation for the foreseeable future.
AB 5 was prompted by a California Supreme Court case that focused on the gig economy and the Court’s desire for a simplified test to address the question of whether a worker is an employee or independent contractor. In Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, the Court replaced the 11-factor test for determining employee vs. independent contractor status established by the Court’s own decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, with the simple and far more rigorous ABC test. The decision created problems for everyone except plaintiff’s lawyers. Industries built on an independent contractor model of business, such as hospitals where physicians are independent contractors, were now apparently operating illegally. Further, the Dynamex ABC test applied only to claims made under the California Industrial Welfare Commission’s Wage Orders, which meant that the Borello test would still be applied to all other claims, such as those brought under the Labor Code or the Unemployment Insurance Code. As a result, it was possible that a worker could be held to be an employee for some purposes and independent contractor for other purposes in the same lawsuit.
To clear up this problem, AB 5 states that, for purposes of the Labor Code, the Unemployment Insurance Code, and the Wage Orders, a person providing services shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied (the ABC test):
(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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(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.
Any exceptions to the terms “employee,” “employer,” “employ,” or “independent contractor,” and any extensions of employer status or liability, that are a part of the Labor Code, the Unemployment Insurance Code, or in a Wage Order, shall remain in effect. Further, if a court of law rules that the ABC test cannot be applied in a particular context based on grounds other than an express exception to employment status, then the determination of employee or independent contractor status shall be governed by the Borello test.
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AB 5 further provides that the holding in Dynamex will not apply to bona fide business-to-business contracting relationships between sole proprietorships, partnerships, limited liability companies, limited liability partnerships, or corporations, and excluding individuals performing services (who will still be subject to the ABC test). In such business-to-business contract relationships, the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:
(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(C) The contract with the business service provider is in writing.
(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) The business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required.