On September 18, 2019, Governor Newsom signed a bill into law that dealt a significant blow to the gig economy and made it even harder to lawfully utilize independent contractors while operating a business. By now, most businesses who utilize independent contractors have heard of the now-infamous Dynamex decision from 2018. In the Dynamex case, the California Supreme Court set out a 3-factor test (often called the ABC test) to determine whether a worker was an independent contractor under the wage orders. Under the ABC test, a worker is properly considered an independent contractor only if the hiring entity establishes:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that 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 ‘B’ prong of the ABC test tends to be most problematic for hiring entities.
AB 5 expands the applicability of the ABC test beyond the Wage Orders to the Labor Code and Unemployment Insurance Code. AB 5 was passed to attempt to force large companies like Lyft and Uber to change their business model. (Until now they have classified their drivers as independent contractors rather than employees). However, the effects will be felt across multiple industries, including transportation, those who hire temporary and seasonal workers, and many others.
While AB 5 is largely a bane to business, the exceptions in the law do provide a small silver lining to certain occupations. The exceptions are primarily directed toward white collar professions. However, there is also an exception for “construction trucking services” (but it only lasts until December 31, 2021) as well as exceptions for certain professions in the personal care industry, such as licensed estheticians, barbers, manicurists, etc. There is also a direct sales exception, as well as an exception for the utilization of freelance workers for marketing, photography, and writing.
There are a number of specific requirements that must be met in order for any of these exceptions to apply. The only way to accurately evaluate the legal compliance of your worker classifications is to conduct an audit that is specific to your company, your employees and the contractors used in your operations. If you would like assistance to determine whether your independent contractors are properly classified, please contact the Holden Law Group.