AB5: A Major Shift in CA Worker Classification

On September 18, 2019, California Governor Gavin Newsom signed into law the controversial Assembly Bill 5 (AB5), which codified the California Supreme Court’s Dynamex decision issued in April 2018. Governor Newsom hailed “AB5” as “landmark legislation for workers and our economy.” But what does AB5’s passage actually mean for companies and workers going forward?

The California Supreme Court’s Landmark Decision in Dynamex
On April 30, 2018, the California Supreme Court issued its groundbreaking decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. There, the Supreme Court upended decades of settled law in California by adopting a new legal standard for determining whether workers are employees or independent contractors. Specifically, the Supreme Court adopted the “ABC Test”, requiring companies to satisfy each of three criteria to establish independent contractor status under certain California laws:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of his or her work, both contractually and in fact; and
(B) that the worker performs work 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.

Prior to Dynamex, independent contractor status was determined by a multi-factor test derived from a 1989 case entitled S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. The Borello Test called for an analysis of several factors, no one factor being determinative of independent contractor status.

In Dynamex, the Supreme Court rejected the Borello Test, holding that businesses were subject to the ABC Test for “wage order” claims (i.e., claims that arise from the California wage orders promulgated by the Industrial Welfare Commission). The decision predictably sent shockwaves throughout the business community, especially as it left open a host of questions, chief among them being whether businesses would be subject to the ABC Test for non-wage order claims as well. As Locke Lord Partner Richard Reibstein rightly noted, “Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might be operating outside of the law.” [See How to Operate in California with Independent Contractors After AB5 Bill Is Signed.]

AB5 Codifies and Further Clarifies the Reach of Dynamex
After several months of intense negotiations (and lobbying), and multiple rounds of revisions, the passage of AB5 now has codified the Supreme Court’s Dynamex decision. Not only does AB5 enshrine Dynamex, it provides that Dynamex is applicable to both wage order claims and non-wage order claims, including claims under the unemployment and disability benefits laws in California. That means workers classified as employees under Dynamex may also be entitled to other employment benefits, such as paid sick days and claims for business expense reimbursements.

However, AB5 did not survive the lobbying process unscathed, as over 50 industries and types of businesses are exempt from AB5, including:

• licensed insurance agents;
• certain licensed healthcare professionals (e.g., physicians, surgeons, dentists, podiatrists, psychologists);
• other licensed professionals (e.g., lawyers, architects, engineers, and accountants);
• broker dealers, investment advisers, direct salespersons, private investigators, and commercial fisherman;
• certain professional service providers that meet all of six specific requirements in the following occupations: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists; 
• licensed real estate salespersons, repossession agents, estheticians, electrologists, manicurist, barbers and cosmetologists;
• business-to-business contractors that meet all of 12 specific requirements;
• selected construction subcontractors and motor club service providers;
• referral agencies connecting clients with service providers that met all of 10 specific requirements in the following industries: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup.

Notably absent from the excepted list are drivers and couriers who work for ride-sharing applications such as Uber and Lyft. Critically, it is important to note that the exemption of a business from AB5 does not automatically establish that workers in that industry are classified properly. For those businesses, independent contractor status still must be established by satisfying the multi-factor Borello Test.

Navigating the Classification Issue After Passage of AB5
While the passage of AB5 means more companies will be subject to the stringent ABC Test for both wage order and non-wage order claims starting January 1, 2020, it also clarifies the scope of Dynamex. So it provides companies with the opportunity to rethink, reconfigure, and implement new policies and practices to reduce the likelihood of costly litigation. That is not to suggest AB5 is without ambiguity; how the courts actually apply it is evolving and presents its own set of challenges. However, AB5, if nothing else, reasserts California’s pursuit of protecting employees in California. By planning ahead, companies can get a clearer picture of the risks to which their business model may expose them and adjust their approaches to worker classification to avoid problems down the road.