California Codifies “ABC” Test to Limit Independent Contractors and Expand Definition of “Employee”

By Swerdlow Florence Sanchez Swerdlow & Wimmer

September 25, 2019

Last year, the California Supreme Court sent shockwaves throughout the business community in the landmark ruling Dynamex v. Superior Court, which limited the use of independent contractors for purposes of claims for wages and benefits arising under the Industrial Welfare Commission (“IWC”) Wage Orders. Last week, California Governor Gavin Newsom signed into law a controversial and closely watched bill entitled AB-5, which codifies Dynamex and expands its scope beyond the Wage Orders to cover all aspects of the employment relationship.

Under the new law, which will take effect on January 1, 2020, an individual providing services in exchange for payment will be assumed to be an employee rather than an independent contractor. In order to rebut that assumption and establish that a worker is properly classified as an independent contractor, the hiring entity has the burden to prove all three elements of the following “ABC” test:

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB-5 goes beyond Dynamex in applying the ABC test to most provisions of the Labor Code and the Unemployment Insurance code. As a result, AB-5 expands the reach of Dynamex beyond the Wage Orders including, but not limited to, claims for paid leave, workers’ compensation, healthcare subsidies, and unemployment insurance claims.

However, as a result of lobbying, a number of industries received exemptions from the law. For example, doctors, dentists, lawyers, accountants, engineers, architects, real estate agents, travel agents, graphic designers – and many other occupations – can properly be classified as independent contractors if they meet the test set forth in the 1989 California Supreme Court decision Borello & Sons, Inc. v. Dept. of Industrial Relations.

In light of AB-5, all businesses with independent contractors in California should determine whether any workers need to be reclassified as employees pursuant to the ABC test. For those industries exempt from the ABC test, businesses should verify that their independent contractors satisfy the Borello test. Contact your SFSS&W attorney if you need any assistance in applying these tests and determining proper employment status.