An Endangered Species by Newly Enacted “AB 5”   

Until April 2018, the 11-factor balancing test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (California Supreme Court) had long applied to classifying workers as employees or independent contractors.

That court then dramatically changed the rules in Dynamex Operations West, Inc. v. Superior Court.  See,  Independent Contractor Status in California Now Falls Under Radically Different Rules (June 2018).  Now, a hiring company could only treat a worker as independent if the individual met three criteria:

• the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
• the worker performs work that is outside the usual course of the hiring entity’s business; and
• the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Confusion followed since Dynamex’s “ABC” definition only applied to the reach of state minimum wage, overtime, meal and rest break and other related rules, with the 11 Borello factors remaining for contractor/employee distinction on all other issues, for example workers’ compensation protections and unemployment benefits.

Assembly Bill (AB) 5 — most of which is scheduled to go into effect January 1, 2020 — is state government’s attempt to more uniformly apply the Dynamex “ABC” test, including to work comp and unemployment.  Yet, true to the legislative process, the new law is full of available exemptions for certain occupations and industries:

• certain medical professionals, licensed lawyers, accountants, enrolled agents, architects, engineers, and private investigators;
• insurance licensees, securities broker-dealers and investment advisers;
• direct salespeople, marketers, human resource administrators, travel agents, payment processing agents, and grant writers, real estate licensees, and repossession agencies;
• graphic designers, fine artists, certain photographers or photojournalists, and certain freelance writers, editors, or newspaper cartoonists;
• licensed cosmetologists, barbers, estheticians, and manicurists; and
• licensed construction contractors that have licensed subcontractors.

Another possible exemption is a business hiring another business to provide work directly to the hiring business and not to its customers.  In suitable circumstances, this may apply to the software industry for example.

Those covered by these exemptions still must meet the Borello factors to claim legitimate independent contractor status.

While many commentators are pointing to the potentially devastating effect of AB 5 on the so-called “gig economy,” the law will also seriously affect many other industries, trucking prominent among them.

Already at work helping companies with implementation, we will be supplementing this overview with additional articles on specific industries or features of the new law.

See also:

• Making Dynamex Retroactive (May, 2019)
• Independent Contractor or Employee? (April, 2019)
• Independent Contractor Status? It Depends (November, 2018)

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

October 4, 2019