Reducing Worker Misclassification: Independent Contractors versus Employees and what the Passage of AB5 Means for California’s Workers
Starting in January 2020, many California workers who are currently treated as “independent contractors” may become reclassified as “employees” under California law. This is due to the recent passage of Assembly Bill (AB) 5, which Gov. Gavin Newsom signed into law on September 18. AB 5 codifies a 2018 California Supreme Court decision on the subject of worker classification and is, according to the Los Angeles Times, “arguably the strongest [legislation] of its kind in the nation, giving the state and cities the right” to sue businesses that misclassify workers.
What Does AB 5 Actually Do?
In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the state Supreme Court established a three-part “ABC” test to determine whether a worker qualified as an “employee” for the purposes of California employment law. Under this test, the worker is presumed to be an employee unless the hiring business can prove the following three conditions are true:
- The worker is “free from the control and direction of the hiring entity” with respect to the performance of their work.
- The worker performs tasks that are “outside the usual course of the hiring entity’s business.”
- The worker is “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
AB 5 effectively writes this ABC test into the state’s Labor Code. But the new law also creates a number of specific exemptions to the Dynamex test. Where an exception applies, a court must instead apply the California Supreme Court’s test for determining employee or independent contractor status, which is based on a 1989 case called S. G. Borello & Sons, Inc. v. Department of Industrial Relations.
What Are the Exceptions?
Some of the types of workers exempt from the Dynamex test include:
- professionals licensed by the State of California, e.g., lawyers, architects, engineers, private investigators, and accountants;
- securities brokers licensed by the state or federal government;
- direct sales salespersons; and
- commercial fishermen working on American vessels.
Dynamex rules also will not apply to a broad range of individuals who provide “professional services,” such as:
- human resources administration;
- travel agents;
- graphic designers;
- grant writers;
- fine artists;
- freelance writers, editors, and newspaper cartoonists; and
- estheticians, licensed electrologists, licenses manicurist, and licensed barbers and cosmetologists.
In order for the professional services exception to apply, however, the hiring entity must first prove all of the following:
- The individual worker has their own business location–which may be the individual’s home–separate from the hiring entity.
- As of July 2020, the individual has a business license and any required professional licenses or permits for their occupation.
- The individual can “set or negotiate their own rates” for any services performed for the hiring entity.
- The individual is free to set their own working hours, outside of any “project completion dates and reasonable business hours.”
- The individual “is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.”
- The individual routinely “exercises discretion and independent judgment in the performance of the services.”
What Does It Mean If I Am Misclassified?
Workers wrongfully classified as independent contractors may be missing out on a slew of benefits provided to employees under California law, including meal and rest breaks and overtime, to name a few. Misclassified workers may have claims to recover their unpaid wages and penalties due to the misclassification.
Contact a California Employment Attorney Right Away If You Have Additional Questions
If you have any questions or concerns about your status under the new law, or believe you have been misclassified as an independent contractor, please contact a qualified California employment law attorney right away.