AB 5, which became effective Jan. 1, is California’s codification of the 2018 state Supreme Court’s Dynamex decision, which established the test for determining whether a worker is an employee or an independent contractor in California. With only narrowly tailored exceptions, the new law greatly limits the classes of workers who will qualify for independent contractor status.
As many California employers now know, under this new test, the “ABC test,” a worker will be presumed to be an employee unless the hiring entity proves all of the following:
(A) that 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;
(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 for the hiring entity.
The ABC test is not flexible at all, unlike the traditional Borello test.
AB 5 exempts only certain types of workers from the Dynamex test, including certain licensed professionals (i.e., insurance agents/brokers; physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians; lawyers, architects, engineers, private investigators, or accountants; securities brokers and investment advisors). Other examples of exemptions apply to certain professional services contracts, including marketing, human resources, travel agent services, graphic design services, grant writing, fine artist work, services provided by certain still photographers or photojournalists, services provided by certain freelance writers, editors, and newspaper cartoonists, and services provided by certain estheticians, electrologists, barbers, manicurists, and cosmetologists. The bill also exempts business-to-business contracting relationships from the Dynamex test if specified conditions are met.
For workers not covered by the Dynamex test, the prior Borello multi-factor test applies to determine whether the worker qualifies as an independent contractor. Even if workers are covered by an exemption, workers are not automatically deemed “employees.” Rather, it just means the Dynamex test does not apply. The traditional Borello test must still be met, which is also difficult to satisfy. AB 5 expressly states that the exemptions are intended to apply retroactively to relieve employers of liability. For workers who are not exempt from Dynamex, the bill clarifies that the Dynamex test will apply to claims brought under the Labor Code, the Wage Orders, and/or the Unemployment Code. AB 5 is a highly detailed bill, with carefully crafted exemptions. Hiring entities with independent contractor relationships should review the bill closely.
Several gig economy companies are challenging AB 5. However, under the current state of the law, many independent contractors should be reclassified as employees. Misclassifying independent contractors can result in significant legal exposure with respect to wage and hour compliance and can lead to state agency audits. Independent contractors who should be employees can also sue for violations of the Labor Code, FEHA and other laws protecting employees. Notably, independent contractor misclassification is a common class action issue.
So, what does this mean for staffing agencies? Typically, staffing agencies classify their workers as employees. However, for those instances when a staffing agency classifies a worker as an independent contractor, the staffing agency must make sure the worker is covered by an exemption and satisfies the traditional Borello test or meets the ABC test. The agency should audit its classifications, with the assistance of counsel to maintain privilege. Make sure the independent contractors actually have a business. A hiring entity must show that the worker is engaged in an independently established business and cannot do this simply by showing that the worker has the right to do so or is permitted by contract to do so. A hiring entity also cannot establish this simply on proof that the worker was not “prevented” from operating an independent business. Instead, the hiring entity must demonstrate that the worker made the independent decision to operate a business and that there are indicia of such an independent business actually operating. The staffing agency should ensure a proper written agreement is in place. Also, the staffing agency should consider having all workers sign arbitration agreements with class action waivers.
