Classifying Employees: New Test Signed Into Law

Last week, Governor Gavin Newsom signed legislation placing in law the test for determining when a worker is an independent contract as outlined in a California Supreme Court decision last year.

AB 5 (Gonzalez; D-San Diego) codifies the “ABC” test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. AB 5 and its exemptions go into effect on January 1, 2020.

Much of the talk surrounding AB 5 has focused on the impact the “ABC” test will have on gig economy jobs, as the new classification test jeopardizes the flexibility and income opportunities the modern employment model provides for thousands of California workers. However, the legislation will affect more than those in the gig industry—it stands to affect nearly every sector of the economy.

Although Assemblywoman Lorena Gonzalez (D-San Diego) did allow carve outs for dozens of industries (allowing them to adopt the Borello multi-factor test instead), many other key industries were left without an exemption.

Exempted from ‘ABC’ Test by AB 5

Industry/Professional Exemptions

AB 5 exempts the following industries and professions from the “ABC” test:

• Insurance agents;

• Securities broker-dealers or investment advisers, who are registered with the SEC FIRA or licensed by California;

• Physicians, surgeons, dentists, podiatrists, or psychologists;

• Licensed lawyers, architects, private investigators, accountants and engineers;

• Veterinarians;

• Direct sales salespersons;

• Licensed realtors;

• Hair stylists/barbers, estheticians, cosmetologists, electrologists and manicurists, subject to narrow circumstances;

• Commercial fishermen working on an American vessel;

• Marketing, but the marketing work must be original and creative in character;

• Registered, or exempt from registration, travel agents;

• Graphic designers;

• Grant writers;

• Fine artists;

• Enrolled agents licensed by the U.S. Treasury to practice before the IRS;

• Payment processing agents;

• Repossession agencies;

• Administration of human resources,
but the work must be intellectual, varied in character and non-standardized;

• Photographers and photojournalists (35 submissions or less, and not applicable for motion picture industry, live shows, music videos, broadcast news, commercial productions);

• Freelance writers, editors or newspaper cartoonists (35 submissions or less);

• Motor club service providers.

Broader Exemptions

AB 5 also has several broader exemptions:

• Business to Business Contracts: For two businesses that contract for services that are provided directly to the contracting business, and not the customer/client (doesn’t include work for which a license is required by the Contractor’s State License Board).

• Construction Contractor/Subcontractor: For this business relationship if certain conditions are met, including the subcontract assumes financial responsibility for all errors or omissions in labor or services, evidenced by insurance, indemnity clauses, performance bonds or warranties.

• Construction Trucking Services: Trucking services only in the construction industry if the trucking contractor registers with the Department of Industrial Relations as a public works contractor, even if the work is not public work; utilizes its own employees to perform the work; the trucking contractor does not utilize a broker; and exemption sunsets on January 1, 2022.

In a statement released on September 18, the day AB 5 was signed, the California Chamber of Commerce recognized the exemptions added to AB 5, but pointed out that the ABC test does not reflect the needs of today’s workforce.

“The fact that the Legislature recognized in AB 5 — and in related legislation — that so many professions and industries include workers who are not appropriately classified as employees is strong evidence that the Dynamex decision should not apply to everyone and there are many industries that still need to be added,” the CalChamber said.

“The test set forth in the Dynamex ruling does not correctly contemplate the realities of the modern economy nor fairly consider the sweeping impracticalities it would bring to the California economy.”

The CalChamber also expressed its commitment to aggressively pursue adding more industry exemptions next year.

“Simply put, much work remains to be done on the Dynamex issue,” the CalChamber stated.

Classifying Independent Contractors

The Dynamex decision upended the way businesses in the state distinguished employees from independent contractors. In Dynamex, the court abandoned a long-established balancing-of-factors test previously adopted by the court in a 1989 decision, S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (48 Cal.3d 341).

This previous approach weighed multiple factors in their totality to account for the variety of California industries and professions, as well as diversity of California’s workers.

In Dynamex, the Supreme Court concluded that individuals are presumed to be employees, and a company classifying an individual as an independent contractor bears the burden of justifying that individual’s independent contractor classification under the “ABC” test.

‘ABC’ Test

The ABC test replaces the previously utilized “right to control” or “common law” test, which focused on the hiring entity’s ability to control how the work was performed. Under the more restrictive ABC test, an individual is presumed to be an employee, unless the company can prove all of the following:

A. That the worker is free from 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; and

B. That the worker performs work that is outside the usual course of the hiring entity’s business; and

C. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

If the hiring entity fails to show that the individual worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor.

Governor’s Signing Message

In his AB 5 signing message, Governor Newsom said: “A next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work—all while preserving flexibility and innovation.”

The Governor said he will “convene leaders from the Legislature, the labor movement and the business community to support innovation and a more inclusive economy by stepping in where the federal government has fallen short and granting workers excluded from the National Labor Relations Act the right to organize and collectively bargain.”