A temporary amnesty from AB 5?

The first month of Assembly Bill 5 has been tumultuous. At least nine bills have been introduced seeking exemptions from AB 5, including for small businesses, newspaper deliverers, freelance journalists, interpreters, translators, and musicians. Several industries have sought exemptions from AB 5 in the courts, including court reporters and freelance journalists. App-based companies have sued in federal court to block AB 5, arguing that the law "irrationally and unconstitutionally" targeted that sector while carving out numerous exemptions for other special interests and favored industries. Recently, both state and federal courts in California have concluded that AB 5 is preempted by the Federal Aviation Administration Authorization Act for truck drivers.

In addition, app-based companies are gathering signatures to qualify for the November 2020 ballot with an initiative that would consider their drivers to be independent contractors. The proposed law would override AB 5 for app-based drivers, and provide drivers with certain benefits, including a net earnings floor, a limit on the hours of work permitted during a 24-hour period, as well as healthcare subsidies, workers compensation and accidental death insurance coverage, and protections from discrimination and harassment.

While industries continue to jockey for exemptions and preemptions in the legislature and the courts, individuals are struggling for clarity on how to comply with the ABC test. For example, Part C of the ABC test requires that the worker "is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed." One California appellate court interpreted Part C to mean that the worker must already be engaged in an independent business, not that he or she could have become so engaged. Does that mean that no one can be an independent contractor start-up? Only established independent contractor businesses can pass the test in Part C?

Few California courts have provided further understanding of the application Part B of the ABC test, which requires the hiring entity to show that the worker performs work that is outside the usual course of business of the hiring entity. In a case by the Supreme Court of Utah involving the B test, the court decided that itinerant bands, musicians, and entertainers who perform at hotels do not meet the B test. The court reasoned that it was usual and customary for hotels to furnish entertainment in connection with the operation of their dining rooms, and thus musicians who perform at hotels, even briefly, must be classified as employees, because their services are within the usual course of business, and the B test was not satisfied. One understands why musicians are seeking a legislative exemption.

Perhaps the most ominous threat to California employers is the risk that the California Supreme Court decides that AB 5 applies retroactively. The question is currently pending with the Supreme Court. In the Supreme Court's 2018 Dynamex decision inaugurating the ABC test, the Department of Labor Standards Enforcement submitted an amicus brief in which they argued that "the Labor Commissioner continues to use Borello as the analytical framework for evaluating independent contractor defenses. Borello has provided a satisfactory basis for analyzing disputes concerning independent contractor status in these individual cases." Other courts have also recognized that the ABC test is "new" law in California. Meanwhile, in 2019, the U.S. Department of Labor issued an opinion letter, and the National Labor Relations Board issued an Advice Memorandum concluding that app-based workers qualified as independent contractors under long-established tests -- but not the ABC test.

If the California Supreme Court decides that AB 5 applies retroactively, there will be a deluge of class action litigation seeking up to four years of liability for claims for minimum wages and overtime for alleged off-the-clock work, meal and rest break premium payments, the reimbursement of expenses, the timely and accurate payment of wages, including final wages, compliant itemized wage statements, and other claims. Private Attorneys General Act claims will explode as well, seeking additional penalties for the underlying Labor Code and Wage Order violations, as well as claims under Labor Code Section 226.8 which imposes penalties of up to $25,000 per violation if there was a pattern of "willful misclassification" of employees as independent contractors.

Employers need a temporary amnesty from AB 5 until the Legislature, the courts, and voters in California sort out the new law. Perhaps a law similar to AB 1513, which was passed in 2016 in response to appellate court decisions that held that employers had to pay piece rate employees separately for nonproductive time and for rest and recovery time. The decisions spurred massive litigation against employers for using piece rate pay systems. AB 1513 provided employers with a short window of time to make back wage payments to workers for rest and recovery breaks and other nonproductive time in exchange for relief from statutory penalties and other damages.

California employers need a similar, affirmative defense from AB 5. Employers should be afforded at least one year to review their independent contractors and whether they qualify for the ABC test. If an employer decides that workers should be reclassified as employees (or that there is a significant risk that they were misclassified), then the employer can make back payments of wages and meal and rest break premiums for up to a three year period. Similar to AB 1513, the employer should have the ability to make a good faith estimate of the amount of back pay and break premiums that may apply. Employers who make the required back payments will have an affirmative legal defense against any claim for damages or penalties based on the failure to properly classify workers, and for any alleged violations of the Labor Code or Wage Orders. With a pause on the punitive aspect of AB 5 in place, the policy purposes of AB 5 would be served, but without the immense costs and penalties caused by massive litigation that retroactively applies a completely new standard for independent contractor classification California. 