Governor Signs AB 5 into Law Codifying ABC Test for Determining Independent Contractor Status

Category: Special Bulletins
Date: Sep 19, 2019 04:13 PM

Yesterday, on September 18, 2019, Governor Gavin Newsom signed Assembly Bill No. 5 (AB 5) into law.  AB 5 codifies the “ABC” test for determining independent contractor status that the California Supreme Court adopted in its 2018 decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903.  AB 5 adds section 2750.3 to the Labor Code and will become effective on January 1, 2020. 

Here is what your agency needs to know about AB 5:

Background on Dynamex

On April 30, 2018, the California Supreme Court issued a decision in Dynamex.  In Dynamex, delivery drivers alleged that the Dynamex company misclassified them as independent contractors.  The Court established a new test, often referred to as the “ABC” test, for determining whether an individual works as an independent contractor or employee.  The Court rejected the longstanding and more flexible multifactor standard established in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.  Under the Borello test, the primary consideration for determining whether an individual is an independent contractor or employee is whether the hiring entity had the right to control the manner and means of the work.  The test also evaluates nine additional factors including the type of occupation, the length of time for which the services were to be performed, and the method of payment.  Under the ABC test in Dynamex, however, the presumption is that the individual is an employee unless the hiring entity demonstrates that all three of the following conditions have been satisfied in order for the individual to qualify as an independent contractor:

A)    The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract terms and in fact;

B)    The individual performs work that is outside the usual course of the hiring entity’s business; and

C)    The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Soon after the Court issued the Dynamex decision, LCW published a Special Bulletin on Dynamex titled: California Supreme Court Adopts New "ABC Test" for Classification of Independent Contracts: Potential Risk and Impact on Public Agencies.

AB 5 Codifies and Expands the California Supreme Court’s Decision in Dynamex

AB 5 creates Labor Code section 2750.3, which codifies the ABC test adopted in Dynamex as listed above, and expands its application beyond Industrial Welfare Commission (IWC) wage orders to the Labor Code and Unemployment Insurance Code.  Importantly, there is no express exemption in AB 5 for public agencies.

Labor Code section 2750.3 also carves out a number of exemptions for occupations that remain subject to the old, multifactor Borello test. These exemptions include, insurance agents; medical professionals such as physicians, dentists, podiatrists, psychologists, and veterinarians; licensed professionals such as attorneys, architects, engineers, private investigators, and accountants; financial advisers; direct sales salespersons; commercial fisherman; some contracts for professional services for marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists, freelance writers, photographers and photojournalists, and cosmetologists; licensed real estate agents; “business service providers”; construction contractors; construction trucking services; referral service providers; and motor club third party agents. 

Additionally, AB 5 applies this new Labor Code section 2750.3 to Labor Code section 3351, which relates to employment status for workers’ compensation coverage.  This portion of the law is effective July 1, 2020.

Finally, AB 5 amends Unemployment Insurance Code section 621 to incorporate Dynamex’s ABC test.  This amendment does not reference the exemptions for occupations in Labor Code section 2750.3 that remain subject to the old, multifactor Borello test.  Thus, those independent contractors who fall into one of the exemptions in Labor Code section 2750.3 may not be exempt from the provisions of the Unemployment Insurance Code unless the conditions of the ABC test are satisfied.

The Impact of AB 5 on Public Agencies

Because IWC wage orders have limited application on public agencies, the Dynamex decision similarly has limited application on public agencies.  However, AB 5 and Labor Code section 2750.3 now extend the ABC test in Dynamex to the Labor Code and Unemployment Insurance Code.  This means that if an individual is an employee of the agency under the ABC test, then corresponding Labor Code provisions applicable to agency employees would now apply to the individual, including workers’ compensation coverage and paid sick leave benefits.  Additionally, if an individual is an employee of the agency under the ABC test, he or she is also now entitled to unemployment benefits under the Unemployment Insurance Code.

Importantly, Labor Code section 2750.3 does not constitute a change of the law, but rather declares the state of the existing law prior to its adoption.  Accordingly, public agencies should evaluate all independent contractor arrangements under the ABC test and Labor Code section 2750.3, and reclassify independent contractors as employees where necessary.  LCW is available to assist your agency in conducting such a review. 

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