By: Ranjani Jagannath

On September 11, 2019, the California Legislature approved a new law that affects the way in which businesses classify independent contractors. This law is enforced pursuant to the California Supreme Court ruling in Dynamex Operations West Inc. v. Superior Court of Los Angeles in April 2018, wherein the Court created a three-pong test (popularly known as the ABC test) to re-classify independent contractors as employees. The new law not only makes it more difficult for businesses to classify workers as independent contractors but also expands the definition of employees creating an entitlement to increased pay, benefits and employment law protections. Below is a summary of the AB5 law and its impact on businesses.

1. The AB 5 Test

For the purposes of the Labor Code, the Unemployment Insurance Code and the wage orders of the Industrial Welfare Commission, a person is considered an employee, rather than an independent contractor, if such person provides labor or services for remuneration, unless the hiring entity demonstrates the satisfaction of all of the following conditions:

1. The person 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;
2. The person performs the work that is 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 of the same nature as that involved in the work performed.

2. Impact of the New Law

By virtue of expansion of the definition of employees, workers considered misclassified under the new law will be eligible for benefits such as workers’ compensation coverage, unemployment insurance, employment benefits, paid sick days and state family leave. Workers now classified as employees, will also be covered by state civil rights laws, including discrimination and harassment protections. Workers considered as employees, will also have the right to organize themselves into labor unions, depending on a joint reading of federal labor law with the new state law. The AB 5 law also impacts business to business contracting relationships, wherein businesses may find themselves liable to the employees of their vendors , as those employees may be able to claim that they are also employees of the “contracting business”, unless twelve requirements laid down in the law are satisfied to qualify for the exemption, including, inter alia, the vendor hired actually provides the same or similar business services to other clients and those services are provided directly to the business and not the business’s customers.

3. Exemptions under the law

The AB 5 law provides an exempted list of workers, subject to qualifications of certain conditions, who are not affected by its reach. This list is expansive and includes:

1. Physician, surgeon, podiatrist, psychologist, dentists or veterinarians;
2. Lawyer, architect, engineer, private investigator or accountant;
3. Securities broker dealer or investment adviser, their agents and representatives;
4. Direct sales salesperson;
5. Contracts for “professional services” (including marketing, human resources administrator and travel agents, among others) subject to satisfaction of requirements;
6. Real estate licensee or repossession agency which are subject to the Business and Professions Code;
7. Relationship between a contractor and sub-contractor in the construction industry, subject to certain requirements;
8. Relationship between a referral agency and a service provider, subject to certain requirements.

We recommend employers in California that employ independent contractors contact a California-licensed attorney to begin a compliance strategy under AB 5 Law, review employment agreements and assist with classification of resources.

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