California Enacts Sweeping Independent Contractor Reform

10.01.2019

Last year, the California Supreme Court adopted the so-called “ABC test” for purposes of enforcing the State Industrial Welfare Commission Wage Orders. In doing so, the Court replaced the independent contractor test that had been in place and followed by businesses for nearly 30 years.

Assembly Bill 5 (“AB 5”) codifies the ABC test for most employers in California, applying the test to the Labor Code, in addition to the Wage Orders, effective January 1, 2020. The ABC test will also apply for workers’ compensation purposes effective July 1, 2020.

The ABC test presumes a worker is an employee. The burden in on the employer to disprove the employer-employee relationship by affirmatively proving each of the following factors:

A. The worker is free from control and direction of the hirer in connection with the performance of the work, both under the contract and in fact.

B. The worker performs work that is outside the usual course of the hiring entity’s business.

C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

The ABC test creates a more difficult burden for businesses to overcome the presumption that a worker is an employee when compared to the historically used Borello test. In Borello, the California Supreme Court held that the right to control the details of how work is performed is the most significant consideration in determining worker status. However, other factors, such as those set forth in the Restatement (Second) of Agency test, and the “economic realities” test, must also be considered in determining whether a worker is an employee or independent contractor. Rather than having to pass each factor, however, courts would weigh the different factors to arrive at a final determination of worker status.  

Industry and Occupational Carve-Outs

AB 5 carves out numerous occupations from the ABC test. For these occupations, the Borello test will apply if certain specified factors are satisfied, such as licensing and other requirements. The following occupations were granted carve-outs under AB 5:

• Insurance brokers
• Physicians, surgeons, dentists, podiatrists, psychologists or veterinarians
• Lawyers, architects, engineers, private investigators and accountants
• Registered securities broker-dealers, investment advisers, their agents and representatives
• Direct sales salespersons
• Commercial fishermen working on American vessels
• Marketing, human resources administration, travel agents, graphic designers, grant writers and artists
• Photographers, photojournalists, freelance writers, editors and newspaper cartoonists
• Licensed estheticians, electrologists, manicurists, barbers or cosmetologists
• Real estate agents
• Licensed repossession agencies
• Bona fide business-to-business contracting relationships
• Construction subcontractors
• Construction trucking services
• Certain referral agencies
• Motor club services

Notably, the business-to-business exemption is restricted to circumstances where the business service provider is providing services directly to the contracting business rather than to the customers of the contracting business. Caddies, instructors and professionals, who provide services directly to clubs’ members would not appear to qualify for the business-to-business exemption. 

Unemployment Insurance

AB 5 also amends the Unemployment Insurance Code to incorporate the ABC test. However, the amendment does not reference the above exemptions. Therefore, workers who fall into one of the exemptions for purposes of the Labor Code may not be exempt from the provisions of the Unemployment Insurance Code unless the ABC test is satisfied.

More to Come

The author of AB 5 already signaled that she will introduce clean-up legislation first thing in the 2020 legislative session. Occupations excluded from the existing carve-outs may seek new carve-outs. Other businesses, such as Uber and Lyft may seek relief from potential application of the ABC test by way of a ballot initiative in 2020. For the time being, businesses should prepare for AB 5 by reviewing the different areas currently engaging independent contractors and determining where such workers fall into place in the new AB 5 dynamic.

Thomas Lenz and Jonathan Judge are partners at Atkinson, Andelson, Loya, Ruud & Romo in Calif. Lenz also is a member of the NCA board and chairs the Government Relations Committee. They can be reached at tlenz@aalrr.com or jjudge@aalrr.com.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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