Important changes for companies that have independent contractors in California
In June 2018, we had reported about the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court, which changed the way the courts would look at independent contractors. (Click here to read full text of “New Test for Independent Contractor Classification”.)
On September 18, 2019 California enacted Assembly Bill 5 (AB 5) into law which takes the court ruling a step further and establishes difficult standards for classifying workers as independent contractors.
Under the Dynamex ABC test, “a person providing labor or services for remuneration” is an “employee rather than an independent contractor” unless the hiring company demonstrates that the worker in question satisfies all of the following three conditions:
- The worker is free from the control and direction of the hirer in the performance of the work, both under the contract for the performance of the work and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under AB 5, the ABC test is extended to the California Labor Code, Unemployment Insurance Code and for workers’ compensation claims. The law also empowers the California attorney general and city attorneys of cities with populations of more than 750,000 to seek injunctive relief to force the reclassification of workers. Misclassification of workers can result in significant costs and wage and hour liability, as well as expenses for employee benefits, unemployment insurance, and workers’ compensation.
AB 5, has several exceptions to the ABC test, including:
- doctors, dentists, and veterinarians;
- lawyers, architects, engineers, private investigators, and accountants;
- securities broker-dealers and investment advisers;
- insurance agents;
- human resources administrators;
- travel agents; marketers, graphic designers, grant writers, fine artists, and certain photographers or photojournalists; and
- certain freelance writers and editors.
The California legislature stated that it intended “to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.”
Companies with independent contractors in California should review independent contractor agreements and relationships and consider reclassification if necessary.