Navigating the impacts of AB 5 for public agency employers

With Assembly Bill 5 going into effect next month on Jan, 1, 2020, many California employers, and specifically public agency employers, are concerned about its impact on their operations. AB 5 creates Labor Code Section 2750.3, which codifies the "ABC" test for determining independent contractor status that the California Supreme Court adopted in its 2018 decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). Under the ABC test, the presumption is that an individual is an employee unless the hiring entity demonstrates that all three of the following conditions have been satisfied in order for the individual to qualify as an independent contractor:

A) The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract terms and in fact;

B) The individual performs work that is outside the usual course of the hiring entity's business; and

C) The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

General Impact of AB 5 on All California Employers

While the California Supreme Court's decision in Dynamex limited the application of the ABC test to Industrial Welfare Commission wage orders, AB 5 extends this test to the Labor Code and Unemployment Insurance Code. In other words, if a worker does not fall within one of the exemptions carved out in AB 5 and cannot meet all three prongs of the ABC test to qualify as an independent contractor, the Labor Code and Unemployment Insurance Code provisions applicable to employees will now apply to that individual. These provisions include workers' compensation coverage, paid sick leave under the Labor Code, and unemployment benefits. Because the ABC test is more employee-friendly than the previous test used for determining independent contractor status, it is likely that many workers previously characterized as independent contractors will no longer qualify as such under AB 5, and in turn, will be entitled to the benefits afforded to employees under the Labor Code and Unemployment Insurance Code.

Additional Considerations for Public Agency Employers

Additionally, AB 5 creates unique challenges and issues for California public agencies. For example, in order for a public agency to meet element "B" of the ABC test, the individual must perform work that is "outside the usual course of the hiring entity's business." For private sector employers, the usual course of business may be clear-cut. Indeed, in the Dynamex case, the company at issue provides same-day courier service. However, what constitutes the "usual course of business" for public agencies may be a more challenging inquiry. Because of the broad nature of public services, the usual course of business of a public agency includes a wide array of services as opposed to a singular focused industry.

Furthermore, it is unclear as to the extent the more restrictive standards set forth in AB 5 will apply beyond the Labor Code and Unemployment Insurance Code. At present, the definition of "employment" for the purpose of CalPERS membership is governed by the standards set forth in Metropolitan Water District v. Superior Court (Cargill), 31 Cal.4th 491 (2004), where the California Supreme Court concluded that the common law employment and multifactor standard applies. Cargill, a 2004 decision, however, precedes Dynamex and AB 5.

Importantly, Labor Code section 2750.3 does not constitute a change of the law, but rather declares the state of the existing law prior to its adoption. Employers should evaluate all independent contractor arrangements in regards to compliance under the ABC test and Labor Code Section 2750.3. 