California AB 5 Changes the Landscape for Use of Contractors

AB 5 codifies the California Supreme Court’s April 2018 decision of Dynamex Operations West Inc. v. Superior Court of Los Angeles (Dynamex). In that case, the court set aside a long-standing multifactor test for determining whether an independent contractor is misclassified, which was developed in the Supreme Court’s 1989 decision in Borello & Sons, Inc. v. Department of Industrial Relations (Borello). Instead, the Dynamex court embraced a more rigid standard that presumes that workers are employees rather than independent contractors unless the hiring entity can establish three factors under the “ABC test”: that (1) the hiring entity does not control or direct the performance of work; (2) the person performs work 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. 

If the hiring entity cannot meet the ABC test, the worker would be considered an employee and thus:

• eligible for minimum wage, overtime pay, and meal and rest breaks, among other protections under the California Labor Code
• eligible for employee benefits such as stock options and 401(k)
• covered under the employer’s workers’ compensation, unemployment and disability insurance
• eligible for paid sick days and paid family leave
• eligible to join labor unions and collectively bargain for wages and benefits

AB 5 includes a number of exemptions. First, it allows courts to rule that the more flexible Borello test should apply in certain situations. That test is centered on the hiring entity’s control over the work at issue, including the manner in which is performed.  

Second, AB 5 specifically exempts certain professions from the ABC test. The following professions and relationships are governed by the Borello test instead: 

• certain medical professionals
• certain licensed professionals, including lawyers, engineers, architects and accountants
• certain financial services workers, including insurance brokers, securities broker-dealers and investment advisers
• real estate agents
• certain builders and contractors
  some professional services workers who meet certain criteria, including marketers, graphic designers and human resources administrators 

Notably absent are workers from the entertainment, ridesharing/delivery and trucking industries, among others.

Finally, AB 5 answers several questions that Dynamex left unanswered, such as whether the ABC test applies retroactively and what laws are affected by its reach. The new law explicitly extends the application of the ABC test to the California Labor Code and Unemployment Insurance Code, whereas Dynamex arguably only applied to the definition of “employee” under the California Wage Orders. AB 5 also states that its codification of the ABC test is “declaratory of existing law,” thus strongly suggesting an intent for the law to apply retroactively.

Without question, AB 5 changes the landscape for companies that use independent contractors in California. We recommend that companies work with employment counsel to reexamine independent contractor roles to determine whether these workers should be reclassified as employees.