Client Alert

 

Legislature Adopts Expansive “ABC Test” for Classifying Workers as Employees

By Dwayne P. McKenzie and Cathy T. Moses

On September 18, 2019, Governor Newsom signed Assembly Bill 5, codifying the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018). As we reported last year, Dynamex adopted the new “ABC test” for determining whether a worker qualified as an employee under California Industrial Welfare Commission wage orders, which impose various requirements on California employers relating to paying overtime and providing meal and rest periods, among other things.  Effective January 1, 2020, AB 5 expands the application of the ABC test to cover determination of a worker’s status as an employee or independent contractor for most purposes, including qualifying for unemployment insurance coverage, workers compensation benefits and employee rights under the California Labor Code.

The “ABC” Standard

As the California Supreme Court held last year in Dynamex, the ABC test presumes that workers are covered employees unless an employer can establish that a worker is an independent contractor by satisfying all of the following ABC factors:

(A) 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; and

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

With respect to (A), the Court stated that a business does not need to control the precise manner or details of work in order to be found to have maintained the necessary control that an employer possesses over employees.

With respect to (B), the Court offered various examples. For instance, when a retail store hires a plumber to repair a leak, that plumber’s services are not part of the store’s usual course of business. In contrast, if a clothing company hires work-at-home seamstresses to make dresses from patterns provided by the company, those workers would be part of the hiring entity’s usual business operation.

Finally, as to (C), the Court emphasized that independent contractors should be individuals who independently take steps to promote their business, including by incorporating, advertising, or offering their services to the public or a number of potential customers. 

Importantly, under the ABC test, if a California hiring entity cannot establish any one of these factors, the worker must be treated as a covered employee for purposes of the IWC wage orders.

Implications of AB 5 and the Broader Application of the ABC Test

The Supreme Court’s decision in Dynamex was limited to using the ABC test to determine when a worker should be deemed an employee under the wage orders. In contrast, a worker’s status as an employee or independent contractor under other laws, such as determining rights under the Labor Code and for unemployment insurance purposes, remained subject to a multifactor test set forth in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989). Under Borello, the California Supreme Court recognized that various factors should be considered in determining whether an individual fell into one category or the other, including whether the person receiving services has the right to control the details of the work, the individual’s opportunity for profit or loss depending on managerial skill, whether the service rendered requires a special skill, and the degree of permanence of the job. 

Because the Borello test is a more flexible standard, workers deemed to be employees under the ABC test and the wage orders could still qualify for other purposes as independent contractors under the Borello test. AB 5 resolves this inconsistent treatment by applying the more stringent ABC test more broadly. Under AB 5, a worker is presumed to be an employee rather than an independent contractor unless an employer can prove otherwise, using all three ABC factors. This determination now extends beyond the wage orders to govern the determination of a worker’s status under the Labor Code and Unemployment Insurance Code.

In light of the stricter standards that it imposes, AB 5 increases employers’ potential liability and risks of misclassification. Because the law was anticipated to force many employers to reclassify workers, numerous industries and employer groups lobbied the Legislature for exemptions to AB 5 before it was passed. As a result, various professions will not be subject to the ABC test, including persons licensed by the Department of Insurance; physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians; licensed professions such as lawyers, architects, engineers, private investigators, and accountants; securities broker-dealers, investment advisers or their agents; direct sales salespersons; and commercial fishermen. 

AB 5 also contains a broad exemption for “business-to-business” contracting relationships. The more flexible Borello test remains applicable to such relationships, if the business service provider is not an individual, is formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation, and the following factors are satisfied:

  • The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
  • The contract for services is in writing.
  • The business service provider has all required business licenses and tax registrations.
  • The business service provider maintains a business location that is separate from the contracting business.
  • The business service provider is engaged in an established business of the same nature as the work performed.
  • The business service provider contracts with other businesses to provide the same or similar services.
  • The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • The business service provider provides its own tools, vehicles, and equipment.
  • The business service provider can negotiate its own rates.
  • Consistent with the nature of the work, the business service provider can set its own hours and location of work.
  • The business service provider is not performing the type of work for which a license from the Contractors State License Board is required.

AB 5 also contains an exemption for subcontractors in the construction industry. Subcontractors remain subject to Labor Code section 2750.5 and the Borello test if: the subcontract is in writing and the subcontractor is licensed by the Contractors State License Board, has all required business licenses and tax registrations, maintains a separate business location, can hire and fire other persons to assist in providing the services, assumes financial responsibility for errors or omissions in labor or services, and is engaged in an established business.  Construction trucking services are also exempt from application of the ABC test if additional requirements of the bill are met, but only for work performed before January 1, 2022.

Given that it expands Dynamex’s reach to other statutory schemes, AB 5 will likely result in increased liability for California employers for misclassification of workers. Employers should take the opportunity to revisit their classifications under the lens of the ABC test, or, if they seek to rely upon one of the numerous exemptions in the new law, should consult counsel to ensure that they are in compliance. 

If you have any questions regarding any of the foregoing or need assistance with any labor or employee relations matter, please contact:

Dwayne McKenzie at 310.284.2279 or dmckenzie@coxcastle.com
Cathy Moses at
 949.260.4629 or cmoses@coxcastle.com

Cox, Castle & Nicholson LLP is a full service law firm offering comprehensive legal services to the business community and specialized services for the real estate and construction industries.  Reproduction is prohibited without written permission from the publisher.  The publisher is not engaged in rendering legal, investment, business or insurance counseling through this publication.  No statement is to be construed as legal, investment, business or insurance advice.

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