AB 5: Worker classification

On Sept. 19, 2019, Gov. Gavin Newsom signed Assembly Bill 5 into law, which officially adopted the "ABC test" articulated in the California Supreme Court's decision in Dynamex Operations West, Inc. v. Superior Court as the method for determining whether a worker is properly classified as an independent contractor. Through the enactment of AB 5, which took effect on Jan. 1, the ABC test applies not only to legal claims brought under California's Wage Orders, but also to claims brought under the California Labor Code and California Unemployment Insurance Code. AB 5 further clarifies when and how the test applies and provides several exceptions to the test.

Pursuant to the ABC test, an individual is an independent contractor only if each of the following is true:

(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.

The ABC test supersedes the prior balancing test set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations that California courts relied on. Pursuant to Borello, the primary inquiry in determining whether a worker was properly classified as an independent contractor was whether the company had the right to control the manner and means by which the work was performed. Courts looked to a number of factors to make that assessment, including whether the company has the right to discharge at will without cause, whether the worker is engaged in a distinct occupation or business, and who pays for equipment and business expenses. In total, courts weighed 11 different factors in assessing whether a worker was properly classified as an independent contractor, and no one factor was determinative. The ABC test is far more predictable but far more difficult to satisfy.

The list of excluded occupations that will remain subject to the Borello factors are:

• Doctors (physicians, surgeons, dentists, podiatrists, veterinarians, psychologists);

• Professionals (lawyers, architects, engineers);

• Professional services (marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists);

• Financial services (accountants, securities broker-dealers, investment advisors);

• Insurance brokers;

• Real estate agents;

• Direct sales (if compensation is based on actual sales and not wholesale purchases or referrals);

• Builders and contractors;

• Freelance writers and photographers (if contributes no more than 35 submissions to an outlet in a year);

• Hair stylists and barbers (if licensed and if can set own rates and schedule);

• Estheticians, electrologists, and manicurists (if licensed);

• Tutors (that teach their own curriculum, and that are not public school tutors);

• Commercial fishermen;

• AAA-affiliated tow truck drivers.

Notably, AB 5 creates no exception (yet) for companies that operate in the "gig economy," which poses a significant threat to ride-sharing companies like Uber and Lyft.

Sarju A. Naran and Ashlee N. Cherry are attorneys at Hoge Fenton.