Shortly after its passing in the California Assembly and Senate, on September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (“AB5”) into law creating significant restrictions on how employers classify their workforce. The new law takes effect on January 1, 2020.
First introduced in the Legislature in December 2018, the new law now codifies the landmark 2018 ruling of the California Supreme Court in Dynamex Operations West, Inc. v Superior Court of Los Angeles. In that case, the court eschewed the long-standing “control test” in favor of a much stricter “ABC test” to be applied by court in determining whether a worker is properly classified as an independent contractor.
According to the ABC test, in order for a hiring company to legally classify a worker as an independent contractor, the hiring company must prove the worker is free from the control and direction of the hiring entity, performs work outside the scope of the entity’s business and is regularly engaged in work of some independently established trade or other similar business. Otherwise, the worker is an employee under California law, regardless of whether the worker signs an independent contractor agreement.
It is no secret that AB5 was specifically targeted toward the emerging “gig economy” and companies like Uber and Lyft. However, the impact of AB5 will be far reaching, beyond delivery drivers and app-based services. But there are specific industry exemptions under AB5, allowing certain workers to be lawfully treated as independent contractors. The exemptions include doctors, insurance agents, securities brokers, accountants, barbers, and hairstylists, lawyers, accountants, engineers and architects, and a handful of other professions. However, it is estimated that many thousands of California workers – across hundreds of industries – will now be classified as employees. And with this unavoidable reclassification comes the requirement to pay minimum and overtime wages, provide workers compensation protections, offer paid sick leave, and a host of other employment related benefits.
The new law will apply retroactively to existing claims. The misclassification of employees is a costly mistake. For many employers, a misclassification lawsuit can present an existential threat – unless safeguards are in place ahead of time. Regardless of size, all California employers must act swiftly to ensure compliance. Now is the time to conduct employment audits, revise employment agreements and handbooks, and update (or implement) arbitration agreements and class action waivers.
All employers should consult with counsel, before the new law goes into effect, to ensure their workforce is properly classified and determine what other risk-avoidance steps are necessary.
Teagan Dow is an employment attorney specializing in employment consulting, HR and risk management. Teagan can be reached at firstname.lastname@example.org.