On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill (“AB”) 5, thereby codifying the California Supreme Court’s landmark decision in Dynamex Operations West, Inc. v. Lee. This represents the culmination of a seismic shift in California employment law that began a little over a year ago.
To refresh, starting in 1989, the leading test in California for distinguishing employees and independent contractors was the multifactor standard set forth in S.G. Borello & Songs, Inc. v. Department of Industrial Relations. Under Borello, the key question was whether the employer “[had] the right to control the manner and means of accomplishing the result desired.” In addition to this factor, the Borello test also endorsed multiple “secondary” indicia in analyzing and determining the employment relationship.
In April 2018, the California Supreme Court issued its decision in Dynamex. In Dynamex, the Court announced a new, more objective standard for determining worker classification for the purposes of the California wage orders. Under this new standard, the burden is on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the coverage of the California wage orders. In order to satisfy this burden, the hiring entity must establish all of the following: (1) that the worker is free from the control and direction of the hiring entity in connection with the performance of work, (2) that the worker performs work that is outside the usual course of the hiring entity’s business, and (3) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
While indisputably game changing, employers subsequent to Dynamex could attempt to take some solace in the fact that subsequent California courts could attempt to narrow the scope of the Dynamex decision. For example, a California Court of Appeal determined that the new standard applied only to claims brought by workers under California’s wage orders, i.e., claims pertaining to minimum wages, maximum hours, and certain other basic working conditions and not to claims brought by workers under the California Labor Code. Any such optimism was extinguished on May 29, 2019 when the California legislature passed AB 5 and Governor Newsom signed the bill this past Wednesday.
The question many California employers are now asking themselves is Now what? As oftentimes is the case when attorneys are involved the answer to this questions depends.
AB 5 exempts from its scope certain professions including licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, a direct sales salesperson, real estate licensees, workers providing hairstyling or barbering services, and those performing work under a contract for professional services. If you are in one of these chosen businesses then you can still rely on the Borello test. If, however, you are not one of these chosen few employers, then you must take steps to immediately come into compliance with AB 5. This means promptly auditing your worker classification processes and procedures to ensure that you either have classified your workers as employees or have some basis on which to classify them as independent contractors under the three-part test set forth in AB 5. For some employers, this many mean specifically (and more narrowly) defining the true scope of your business. For others, it may entail focusing on only engaging with workers with established businesses.
In addition to exempting numerous categories of workers from its scope, AB 5 also differs from Dynamex in another important aspect. Specifically, the law provides that a court can rule that the Dynamex standard cannot be applied in certain contexts and then determine that a worker’s classification should be analyzed under the test set forth in Borello. While it remains to be seen exactly how California courts will interpret this provision, it does seem to provide courts with a certain amount of flexibility in deciding whether to apply Dynamex or Borello.
When it goes into effect on January 1, 2020, AB 5 will undeniably make life more difficult for the majority of California employers. Being an employer operating in California, however, has never been easy. The path forward, as always, entails California employers doing their best to ensure that they are complying with the law and avoiding any unnecessary liability. And the best way to stay on that path is to stay apprised of the current state of the, remain vigilant in learning about any new or trending bills, and consult experienced legal counsel whenever questions arise (as they undoubtedly will).