California dreaming, California nightmare – three takeaways from controversial independent contractor bill

Overview
Takeaway 1 – audit your independent contractor agreements now
Takeaway 2 – pay close attention to exemptions
Takeaway 3 – joint employer test remains

Overview

On 18 September 2019, after months of speculation, California Governor Gavin Newsom signed Assembly Bill (AB) 5 into law, making it more difficult for California businesses to classify workers as independent contractors. AB 5 codifies and expands the California Supreme Court's 2018 holding in Dynamex Operations West v Superior Court of Los Angeles(1) and applies the 'ABC' test to most independent contractor questions under California employment law. The ABC test presumes that a worker is an employee unless the hiring entity can establish that the person:

• is free from the control and direction of the hiring entity in connection with the performance of the work, both under the relevant work contract and in fact;
• performs work that is "outside the usual course of the hiring entity's business"; and
• is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

AB 5 represents a tectonic shift in how businesses classify workers. For years, California businesses relied on the easier to satisfy multifactor test set out in SG Borello & Sons, Inc v Department of Industrial Relations(2) in order to classify workers as independent contractors. However, in 2018 the California Supreme Court held in Dynamex that the more rigorous ABC test should apply to independent contractor questions arising under the California Industrial Wage Commission Wage Orders.

AB 5:

• codifies and expands Dynamex;
• retroactively applies the ABC test to claims made under the Labour Code in order to enforce wage order claims;
• prospectively applies the ABC test to all other claims made under the Labour Code and the Unemployment Insurance Code; and
• allows the statute's broad list of exemptions to be retroactively applied.

Takeaway 1 – audit your independent contractor agreements now

Now that AB 5 has been signed into law and the retroactivity of the law has been codified, it is critical to audit existing independent contractor arrangements to determine whether an exception may be applied retroactively. Several exemptions, including the professional services and business-to-business exemptions, may now be used to mitigate against future claims. Ensuring proper classification now is also important because misclassification under California law can be costly. Misclassified workers can recover:

• unpaid wages (eg, overtime);
• meal and rest period premiums;
• unpaid business expenses; and
• significant penalties (eg, waiting time, wage statement and potential Private Attorneys General Act penalties (for further information please see "California's employment regulatory scheme: PAGA in wake of Epic Systems")).

In addition, AB 5 gives the California attorney general and certain city attorneys the authority to seek injunctive relief against offending employers to prevent the continued misclassification of employees.

Takeaway 2 – pay close attention to exemptions

Although broad, the exemptions are also limited. Specifically, while several of the exemptions may appear to apply to businesses on their face, the statute is littered with qualifications and hard to satisfy standards. Perhaps more importantly, even if an ABC test exemption applies, independent contractor arrangements will still need to satisfy the Borello test.

Takeaway 3 – joint employer test remains

The ABC test and Dynamex should not apply to joint employer questions of liability, which remain governed by the Supreme Court's decision in Martinez v Combs.(3) AB 5 directs the ABC test to the hiring entity (ie, the direct hiring organisation).

For further information on this topic please contact Robert Cocchia or Peter Stockburger by telephone (+1 619 236 1414) or email (robert.cocchia@dentons.com or peter.stockburger@dentons.com). The Dentons website can be accessed at www.dentons.com.

(1) 4 Cal 5th 903 (2018).

(2) 48 Cal 3d 341 (1989).

(3) 49 Cal 4th 35 (2010).