The California State Assembly passes a Bill that codifies the infamous “ABC” test for independent contractor determination — will the Senate follow suit, and will the Governor sign the new legislation into law?
The New Bill
On May 29, 2019, by a 55-11 vote, the state Assembly passed AB 5, a bill that would codify the California’s Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court.
As a reminder, a little over one year ago, in Dynamex, the California Supreme Court adopted the “ABC” test for determining whether workers are properly classified as independent contractors under California’s wage orders. (For more on this landmark decision, see our previous alert HERE.)
The ABC test presumes that a worker is an employee unless a hiring entity can establish the following three conditions:
A. That the worker 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. 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.
Dynamex quickly garnered the attention of companies (in particular, platform companies in the gig economy) that engage independent contractors. Several high profile companies have tried to limit Dynamex‘s reach by lobbying the California legislature to reverse the Court’s decision through legislation, or at least to limit its scope.
But AB 5 is even more far-reaching than Dynamex.
While the Dynamex decision was limited to causes of action for alleged violations of the California wage orders, AB 5 would make the ABC test applicable to all provisions of the California Labor Code and Unemployment Code.
AB 5, however, specifically exempts certain professions from coverage, including certain health care professionals, hair stylists, licensed real estate and insurance agents, and investment advisers. For these workers, courts would resolve claims of misclassification using the more flexible, multi-factor test in place before the Dynamex decision was issued. Gig economy companies are notably absent from this carve-out.
What’s Next?
AB 5 will now go to the state Senate where the legislation could undergo significant changes. If the Senate votes to enact the legislation, it heads next to the Governor’s desk. While it is not clear if these things will happen, companies that rely on independent contractors still should continue to evaluate their use of independent contractors under the ABC test.
Contact your Baker McKenzie employment lawyer for assistance managing your non-employee population.