Independent Contractors in California, Dynamex, and AB 5: An Update

If your business or organization hires workers in California, you’ve probably heard rumblings about the recent changes to California’s independent contractor classification. In the last few months alone, we’ve seen a spike in questions about this topic across a number of industries, so we thought it was important to dive deep into California’s new contractor laws.

A Brief History of Independent Contractor Law in California

Before 2018, the California test for independent contractor classification was a multifactor “Borello” test. Under this previous test, the court presumed that a worker was an employee, but this was a rebuttable presumption. This means that an employer could argue for independent contractor status if enough of those Borello factors were present. The actual determination of whether a worker was an employee or independent contractor would depend upon eleven factors, including the kind of work being performed, whether the worker was specially skilled, the permanence of the work, and even whether the parties understood the relationship to be that of an independent contractor relationship. All eleven factors were considered, but none of these were controlling by themselves. Meaning, it was a highly fact and industry specific based inquiry. AKA, if more factors look like there’s independence for the worker, the more likely it’s a contractor; less independence means it’s more likely an employee.

Fun, nerd fact: you can actually still find this test on certain California government websites; that’s how widely understood this test was to be the law and how widespread its dissemination was. Also, the IRS still uses an 11 factor test, which echoes the factors that were previously used in California! But then came a new California test, throwing most of what we knew about classifying independent contractors out the window: Dynamex.

The Dynamex Decision

In April of 2018, the California Supreme Court handed down Dynamex Operations West v. Superior Court. With this case came the ABC test, a three factor test which is used in Massachusetts and New Jersey.

Under Dynamex, the court presumes that a worker is an employee unless an individual satisfies all three factors of the new ABC test. The factors are:

Factor A: That 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; AKA, You don’t control how they work, where they work, and when they work.

Factor B: That the worker performs work that is outside the usual course of the hiring entity’s business; AKA, The work that they perform is not essential to the work your business does.

Factor C: That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. AKA, They perform this work for others, not just you.

More on Factor A

Factor A, the “control” factor, covers a broad spectrum of behaviors. If you tell a worker when, where, or how they need to work, that’s control. Giving a worker their tools or training them can be seen as control. And  asking them to use your branding or logos can even be considered control. The more control there is, the more likely that your worker is an employee and NOT a contractor.

More on Factor B

Factor B means, in a nutshell, that if you’re contracting someone to perform work that is core to your business, they’re more likely to be an employee. For example, if you are a graphic design company and you contract a graphic designer, their work is core to your business. In that case, it’s a lot harder (if not impossible) to argue that they are an independent contractor! However, if you are a law firm and you hire a graphic designer, you’re going to have an easier time arguing that you’ve hired an independent contractor. Why? Because because graphic design is not core to lawyering.

More on Factor C

Factor C is trickier, but let’s bring it back to the example of lawyers. If you engage a law firm to handle your business’ needs, and you eventually decide to let this law firm go, chances are that you are not their only client and they will go on offering their legal services elsewhere. That’s because lawyers are typically and independently established trade, meaning without you, they still have a job! They’re not your employee, they are an independent contractor that does the occasional legal project for you.

This puts a lot of industries in a gray area, which is a little bit problematic, right? Welp, that’s probably why we’ve seen a spike in inquiries about this!

But here’s the deal: Dynamex is “case law,” meaning it’s law created by courts and judges, and this is different that “statutory law,” which is law created by legislators. After Dynamex was handed down, Assemblywomen Lorena Gonzalez Fletcher and Melissa Melendez, respectively, decided to take case law one step further and two bills were written: one favoring the ABC test (AB 5, which doubles down on case law and “codifies” it as the current law) and one favoring a return to the original Borello test (AB 71, which says “to heck with you, case law! The people have spoken!”).

AB 71 has made little movement and is still stuck in the assembly. But AB 5 had luck (and lobbyists) on its side, and the assembly voted in favor of this bill on May 29.

Assembly Bill (“AB”) 5

Now, it’s up to the senate to vote on AB 5.  As-is, the bill lays out a list of professional exemptions to the ABC test. The senate could ask for amendments (or edits) to the bill which would change the nature of these exemptions. But we’re getting ahead of ourselves! Let’s look at what’s already been proposed. Under AB 5 as-is, the prior Borello test would continue to apply to:

“licensed insurance agents, certain licensed health care professionals [such as medical doctors and surgeons], 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.”

Additionally, the bill would also make exemptions for booth renters that are licensed under the State Board of Barbering and Cosmetology, requiring the board take certain steps by 2021. What does all of this mean? It means that any business or organization that falls outside of these exemptions would be subject to the stricter ABC test. Oh yeah, and this test may even be retroactively applied!

This list of exemptions in its current form is incredibly limited, and retroactivity is scary to think about! If the Senate passes AB-5, it will go to Governor Newsom, who can then either sign or veto it. Let’s make sure he sees the bill in a form that best protects the interests and needs of California workers; this is where you come in.

What You Can Do

As we mentioned, the senate can still ask for amendments to the bill before voting in favor of it. If you feel strongly that this bill will affect you or your industry, reach out to your state senator! You can determine who your senator is (not Kamala Harris or Dianne Feinstein, they’re your senators in the United States Senate) using this handy tool. From there, do a quick internet search to figure out the best way to contact them, and let your voice be heard. Let them know you’ve done your research, that you’re paying attention to this issue, and how it would affect you or your industry!

Godspeed!

By: Olivia Phillips – 06/18/19

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Photo by Maarten van den Heuvel