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June 2019

Senate Set to Vote on Codifying Independent Contractor Classification

Following passage through the California State Assembly with a 59-15 vote, the California Senate Rules Committee is now set to review Assembly Bill 5, and millions of independent contractors may be affected by the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court.

In April 2018, with the much anticipated Dynamex decision, the California Supreme Court adopted the “ABC Test” to determine if workers may properly be classified as independent contractors under the wage orders. The Court held that hiring entities carry the burden to show that all three factors of the test must be met to lawfully classify a worker as an independent contractor:

(A) The individual is free from control and direction in connection with the performance of the service, both under his/her contract for the performance of service and in fact; and,

(B) The service is performed outside the usual course of the business of the employer; and,

(C) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

In its current form, last amended on May 24, 2019, AB-5 does provide certain exceptions to the “ABC Test.” As enumerated, physicians, surgeons, securities broker-dealers, investment advisors, some salespersons, real estate agents, hairstylists, and barbers are not subject to the test. As currently drafted, the “ABC Test” does not apply to a contract for professional services. Such employment relationships shall be governed by a different test adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. Under the Borello test, a worker may be classified as an independent contractor if he or she satisfies all of the following factors:

(A) The individual maintains a separate business location,

(B) The individual has a business license,

(C) The individual has the ability to use his/her own employees in the completion of the work and has the authority to hire and fire assistants,

(D) The individual has the ability to engage in other contracts for services than with the hiring entity,

(E) Both the individual and the hiring entity have the ability to negotiate compensation for the services performed,

(F) The individual has the ability to set their own hours,

(G) Where reasonable, the individual can determine where to perform the services under the contract,

(H) The individual is available or customarily engaged in the same type of work performed under the contract with another hiring entity, and

(I) The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

Should the Senate Rules Committee pass AB-5 and codify the “ABC Test” as Labor Code section 2750.3, it is expected to have sweeping effects on California’s “gig economy,” a labor market in which short-term contracts permit workers to serve as independent contractors to various businesses. Those businesses thriving in the “gig economy” should immediately, if not already, re-evaluate the classification of its workers.

Reclassifying independent contractors to employees could increase a company’s financial obligations. Those increased financial obligations are reflected in additional state and federal taxes, unemployment insurance, protected leave, overtime pay, workers’ compensation, minimum wage guarantees, and compliance with technical wage and hour laws. Furthermore, consistent with the Ninth Circuit holding in Vazquez v. Jan-Pro Franchising International, Inc., it is the clear intention of the Legislature and Judiciary that Dynamex and the codification is AB-5 will have retroactive effects on companies throughout California.

At this time, we will continue to monitor the progress of AB-5 as it makes its way through the California State Senate. It is expected that a vote will take place in September 2019. Meanwhile, it is recommended that employers reassess the classification of any independent contractors and consult with their counsel before engaging with independent contractors to ensure that such engagements are protected under the applicable test.

Employment Law

Linh T. Hua
Debra Ellwood Meppen

Employment Law