Will California pass legislation addressing the Dynamex ruling?

When the California Legislature convened in December for the start of the 2019-2020 legislative session, it was clear from the very first day that Dynamex would be the most significant employment issue to be tackled in Sacramento this year.

In case you've been living under a rock for the last year or so, the most significant and pressing concern facing California employers is continued fallout from the blockbuster decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 2018 DJDA R 3856, where the court adopted an entirely new test for determining whether an individual is an employee or an independent contractor. This new legal standard, known as the "ABC test," makes it more difficult for businesses to utilize independent contractors and threatens to upend entire industries in California -- and has potential far-reaching implications for the gig economy in particular.

To recap, under the new "ABC" test, a worker is considered an employee under the Industrial Welfare Commission Wage Orders unless the hiring entity establishes all three of these prongs: (a) 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) the worker performs work that is outside the usual course of the hiring entity's business; and (c) 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.

Last August, there was an attempt by the business community to come up with a legislative solution to some of the difficulties created by this new standard, but that effort fizzled when legislative leadership announced that there would be no discussion of the issue in 2018.

In December, Assemblymember Lorena Gonzalez (D-San Diego) introduced Assembly Bill 5 on behalf of organized labor to serve as the vehicle for legislative discussions with the business community concerning Dynamex. Negotiations have been underway behind closed doors for the last few months as labor attempts to preserve (or expand) as much of Dynamex as possible, and the business community looks for relief.

Recently, AB 5 was amended, indicating that negotiations are advancing, and to the benefit of some industries. Specifically, the bill was amended to provide that the ABC test would not apply to the following: a person or organization licensed by the California Department of Insurance; physicians or surgeon licensed by the state of California; securities broker-dealer or investment advisor or their agents or representatives registered with the SEC or FINRA or licensed by the State of California; and direct sales salesperson under Unemployment Insurance Code Section 650. For these individuals, the analysis of employee or independent contractor status would be made under the previous Borello standard.

The California Chamber of Commerce and others issued a letter stating they support the bill if amended "to provide a more progressive and holistic approach" to the application of Dynamex. The business groups raised a number of additional amendments that should be made to the bill. These include: (1) a broader exemption that would apply to many other professionals; (2) a broader exemption for individuals that prefer to make their own schedules with regard to the days and hours they work and make their own decisions regarding to whom they perform services; (3) an exemption for business to business contracts; and (4) preservation of the ability to subcontract for short-term projects and unexpected, immediate demands for additional help.

Several other industry groups have expressed similar concerns about the amendments to AB 5, and have taken an "oppose unless amended" position on the bill.

It should also be noted that while AB 5 is touted as a proposal to "codify" Dynamex, as amended it actually goes further than that and would expand the reach of the decision. While the Dynamex decision itself was limited to claims arising under the IWC Wage Orders, AB 5 states that the ABC test applies both for purposes of the IWC Wage Orders and the entire Labor Code. A recent Court of Appeal decision (Garcia v. Border Transportation Group LLC, 2018 DJDAR 10354) held that Dynamex was limited to claims arising under the IWC Wage Orders, and did not apply to statutory claims or other areas of the law. AB 5 would overturn this limitation and extend the ABC test to the entire California Labor Code.

The good news is that legislative negotiations are ongoing. At a recent committee hearing on AB 5, both labor and the employer community acknowledged that good faith discussions were underway and would continue. At the end of the day, the question for California employers will be whether the legislature provides any meaningful relief, or does further harm by merely codifying and expanding and already-difficult standard.

AB 5 passed the Assembly Labor Committee on April 3 and is currently pending in the Assembly Appropriations Committee.