For companies that rely on independent contractors to make up or supplement their workforce, January 1, 2020, will no doubt present a challenge. In previous newsletters, we have discussed California Assembly Bill 5 (“AB5”) and the California Supreme Court decision in Dynamex Operations West v. Superior Court, No. S222732 (“Dynamex”) which AB5 sought to codify. (See here and here). In short, AB5 will codify the Dynamex test for determining which workers are employees and which are independent contractors. It is expected that many workers who were or are classified as independent contractors will now need to be reclassified as employees – triggering the newly classified employees’ rights to wage and labor law protections, and costing employers who will now owe higher taxes (and likely higher wages) following the reclassification. AB5 will become effective on January 1, 2020, giving employers about three months to ensure they are classifying their workers correctly.
Last year, the California Supreme Court decided in Dynamex that a new “ABC” test was the appropriate test to determine whether a worker is an independent contractor or an employee. The test is as follows: to prove a worker is an independent contractor, the employer must show: (A) the employer has limited control over the worker, (B) the worker is not performing tasks which are within the employer’s normal course of business, and (C) the worker has his or her own business under which he or she completes those tasks. Although prongs A and C likely do not pose significant hurdles for employers to clear, prong B certainly does. It is unclear exactly how narrowly employers will be allowed to define their normal course of business in arguing certain workers are not performing tasks within that course of business. (Think of Uber classifying itself as a “technology company” in an attempt to show its drivers are not performing tasks within the normal course of business of such a company.)
AB5, in certain respects, both broadens and tightens the effect of the Dynamex decision. Originally, the Dynamex decision only applied to classification of workers in relation to Wage Orders – meaning not all labor laws would be scrutinized under the ABC test. AB5 changes that. Now, workers must be classified correctly under the ABC test for all labor laws, including unemployment insurance, worker’s compensation, and wage and hour laws. This expansion is sure to be felt by employers who are being sued for a variety of wage and labor violations, employers challenging unemployment decisions, and employers facing EDD audits.
On the other hand, AB5 also includes a number of carve-outs for certain industries. Where previously there were no exceptions to workers who would be subject to the Dynamex decision, AB5 provides carve-outs for the insurance industry, physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians operating under a properly issued license; properly licensed lawyers, architects, engineers, private investigators, and accountants; securities broker-dealers, investment advisers, and their agents registered with either the relevant federal or state agency; and certain commercial fishermen. The above will be governed by the existing Borello test. Real estate licensees and repossession agency workers will be governed by a combination of the Business and Professions Code and the Borello test.
If your company uses independent contractors and you have not scrutinized that practice under the Dynamex ABC test, the time to do so is now.
If you are uncertain whether your workers are properly classified, do not wait until you are a defendant in a misclassification suit to find out. The attorneys at Navigato & Battin can assist you in this determination, and provide you with peace of mind that when January 1, 2020, rolls around, your company will be in compliance with Dynamex and now AB5.