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AB 5: Clarity for Some Employers, Uncertainty for Others

On September 18, 2019, Governor Gavin Newsom signed Assembly Bill 5 (AB 5) into law, which codifies the California Supreme Court’s unanimous 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.  AB 5 will take effect on January 1, 2020. The landmark legislation is intended to reduce the misclassification of workers by adopting and expanding the “ABC” test established in Dynamex for determining whether a worker should be classified as an employee or an independent contractor. The law makes it more difficult for employers to improperly classify workers as independent contractors instead of employees. In California, it is estimated that AB 5 may impact over one million workers currently classified as contract workers. Unlike employees, independent contractors are not entitled to minimum wage, rest breaks, overtime pay, unemployment and disability insurance, mandatory leaves of absence, workers’ compensation, and are not protected by anti-discrimination and retaliation laws.

Which Employing Entities Are Affected?
The Legislature’s intent was to clarify which industries will be subject to the new “ABC” test. While AB 5 targets ride-share companies, it has the potential to regulate virtually every private sector employer in the state. However, the new law expressly excludes certain occupations from its purview, including, but not limited to, doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountant, architects, private investigators, real estate agents, and some classes of engineers, among many more classifications. Whether public entities are exempt from the new law is not specifically addressed, although AB 5’s empowerment of the Attorney General and specified “local prosecuting agencies” to enforce the law suggests that its provisions may not apply to public employers. In addition, public entities are exempted from numerous provisions in the labor code and wage orders. Accordingly, there is ambiguity surrounding the law’s application to public employers.

What Does This Mean for Employers?
Under the “ABC” test, to prove that a worker is properly classified as an independent contractor as opposed to an employee, the putative employer must establish all three of the following elements:

  1. The worker is free from the employer’s control and direction in connection with the performance of the work, both under the contract and in fact.
  2. The worker performs work that is outside the usual course of the employer’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

For professions that are exempt from AB 5 or otherwise outside the bounds of coverage as determined by the courts, the pre-Dynamex common law standard will be used to assess a worker’s status as an employee or independent contractor.

What to Watch Out For
It is important to note that methods for enforcing AB 5’s provisions have been added, authorizing California’s Attorney General, local prosecutors, and specified city attorneys to take legal action against entities violating AB 5. The new law also broadens the Dynamex ruling by applying the “ABC” test to all claims brought under California’s Labor Code, unemployment insurance laws, and wage orders.

What’s Next
The provisions of AB 5 will prospectively apply to work performed on and after January 1, 2020, but for existing claims and actions, AB 5 will apply retroactively. Though AB 5 will take effect on January 1, 2020, it will likely face legal challenges which could delay the implementation of its key provisions. It is expected that new legislation will be introduced in January 2020 to further clarify AB 5’s applicability and potentially grant additional exemptions. All employers, particularly public entities, need to consult with legal counsel and carefully review AB 5’s potential application.