California Assembly Bill 5 Significantly Impacts Entities Using Independent Contractors

Governor Gavin Newson is fully expected to sign Assembly Bill 5 (AB 5) into law this month and it will significantly affect any business who utilizes independent contractors in California. The Bill was passed by the California Senate on September 10th and the California Assembly on September 11th.  Once signed, it will take effect January 1, 2020. 

In April of 2018, the California Supreme Court issued the Dynamex Operations West Inc. v. Superior Court of Los Angeles[1] (Dynamex) opinion. Dynamex uprooted a nearly thirty year old multifactor test that determined whether a person providing labor or services for remuneration may be classified as an independent contractor rather than an employee.  Instead, the Dynamex Court embraced the “ABC test.” This new test presumes that workers are employees unless the hiring business can establish three factors: (1) the hiring business does not control or direct the performance of work; (2) the person performs work outside the usual course of the hiring entity’s business; and (3) the person is customarily engaged in an independently established trade, occupation or business. AB 5 codifies Dynamexand the ABC test.

Failing to meet the ABC test means the hiring business must classify the worker as an employee. The effect of this classification is that the employee is: 

  • eligible for minimum wage, overtime pay, and meal and rest breaks, among other protections under the Cal. Labor. Code;
  • eligible for employee benefits such as stock options and 401(k);
  • covered under the employer’s workers’ compensation, unemployment and disability insurance;
  • eligible for paid sick days and paid family leave;
  • eligible to join labor unions and collectively bargain for wages and benefits.   

Certain medical professionals, licensed processionals (e.g., lawyers, engineers, architects, and accountants), and financial service workers (e.g., insurance brokers, securities broker-dealers and investment advisors), as well as real estate agents, certain builders and contractors, and some professional services workers (e.g., marketers, graphic designers, and human resources administrators), are specifically exempt from the ABC test and instead will be analyzed under the old multifactor test.

AB 5 is further reaching than the prior test as it applies to the California Labor Code and Unemployment Insurance Code. Additionally, language in the Bill suggests the intent is for the law to apply retroactively. Any hiring business using independent contractors in California should be aware of AB 5 and the significant new changes it brings.   

[1] Dynamex v. Superior Court (2018) 4 Cal. 5th 903. 


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