Landmark California Independent Contractor / Employee Legislation Signed

Today, Governor Newsom signed a bill that strengthens protection against misclassification of California workers as independent contractors.  The bill - AB5 (available here) - will be codified as Labor Code 2750.3, among other amendments, beginning January 1, 2020.  The effect of the bill is to expand the use of the so-called "ABC test" or "Dynamex" test for distinguishing an employee from an independent contractor.  Under the ABC test, a person providing labor or services for pay (with narrow exceptions) is considered an employee, not an independent contractor, unless the hiring entity proves all of the following:  

• (A) The person is free from the 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.
• (B) The person performs work that is outside the usual course of the hiring entity’s business.
• (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The real-world stakes of employee / independent contractor classification are high:  workers classified as independent contractors lack a whole range of basic protections - overtime pay, minimum wage, expense reimbursement, social security, unemployment insurance, worker's compensation insurance, paid sick leave, and paid family leave.  The temptations for employers to misclassify are high, resulting savings from not providing the foregoing benefits, as well as payroll tax savings, and lessened administrative costs from, for example, not tracking non-exempt employees' hours and ensuring that they receive the required rates of pay and meal and rest breaks.

From the perspective of worker protection, AB5 was a necessary step to keep up with changes caused by smartphone technology.  Smartphones and algorithms now allow companies to manage workforces remotely and allow workers to sign in and out of work at irregular, flexible intervals in a way that was not possible when most of the Labor Code was conceived of.  That added degree of freedom does not change the fact that so-called "gig workers" are company workforces, and as such, they are meant to be protected by the Labor Code.   

AB5 completes a job that the California Supreme Court started in its Dynamex decision, discussed previously in this blog.  There, the Court adopted the ABC test for purposes of California's "wage orders," which contain requirements such as minimum wage, overtime, and meal- and rest-break requirements.  However, the Dynamex decision did not adopt the ABC test for any other purpose, such as for provisions of the Labor Code not found in the Wage Orders, or for purposes of workers' compensation law.  Therefore, a single worker's claim for overtime based on misclassification as an independent contractor would depend on the outcome of the ABC test, while the same worker's claim for unreimbursed business expenses would depend on the outcome of a different test.  AB5 resolved these inconsistencies and provided Legislative confirmation of the Supreme Court's adoption of the ABC test. AB5 states that it generally applies retroactively to the maximum extent permitted by law.

AB5 has been strongly opposed by Uber and Lyft, which still classify their workers as independent contractors notwithstanding the Dynamex decision.  How these companies, and other gig economy companies that rely on workforces made up of independent contractors, will react to the signing of AB5 remains to be seen.