It’s now official. After months of speculation, California Governor Gavin Newsom signed Assembly Bill (AB) 5 into law on September 18, 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, 4 Cal. 5th 903 (2018) (Dynamex) and applies the “ABC” test to most independent contractor questions under California employment law. The ABC test presumes a worker is an employee unless the hiring entity can establish:  

1. 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;
2. The person performs work that is “outside the usual course of the hiring entity’s business”; and
3. The person 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 multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) (Borello) to classify workers as independent contractors. 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 Labor Code to enforce Wage Order claims, prospectively applies the ABC test to all other claims made under the Labor Code and Unemployment Insurance Code, and allows the statute’s broad list of exemptions to be retroactively applied. 

Takeaway No. 1 - Audit Your Independent Contractor Agreements Now

Now that AB 5 has been signed into law, and the retroactivity of the law is codified, it’s critical to audit your existing independent contractor arrangements to determine whether any exception may be applied retroactively. Several exemptions, including the professional services and business-to-business exemptions, may be utilized now 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 (e.g., overtime), meal and rest period premiums, unpaid business expenses, and significant penalties (e.g., waiting time, wage statement, and potential PAGA penalties. 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 No. 2 - Pay Close Attention To The Exemptions

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

Takeaway No. 3 - Joint Employer Test Remains

It’s important to remember that 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, 49 Cal. 4th 35 (2010. AB 5 directs the ABC test to the “hiring entity” (i.e., the direct hiring organization).

The Dentons Employment and Labor team is well situated to help companies of all sizes audit their workforce, revise existing relationships to align with AB 5, and think through creative strategies that can both ensure compliance and increase market share. To learn more about AB 5, please reach out to one of the key contacts listed.