As a notorious trend-setter in the employment law realm, California ranks among the toughest in the nation when it comes to regulations imposed on employers that conduct business within the state. Accordingly, compliance with the plethora of employment laws in California has become more and more challenging every year and it looks like things will be no different in the new year with the passage of Assembly Bill 5 (AB 5).

Assembly Bill 5 (AB 5) Explained 

AB 5, effective January 1, 2020, dramatically alters the legal standard applied in evaluating a hot-button issue in California – whether a worker is classified as an employee or an independent contractor. Most significantly, AB 5 expands and codifies the landmark California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County.

Before Dynamex, California used the "right to control" test established in S.G. Borello & Sons, Inc. v. Dep't of Indus. Relations to determine whether a worker should be classified as an independent contractor or employee. Under the multi-factor Borello test, the primary factor to determine worker classification was the degree of control exercised by the hiring entity over the manner and means of the worker’s performance. In addition, courts considered numerous secondary factors including who purchased the work tools and equipment, whether the worker performed services for companies other than the hiring entity, and who assumed risk for profit and loss.

However, the California Supreme Court’s decision in Dynamex drastically shifted the landscape of independent contractor law in California by adopting the “ABC Test.” Under the ABC Test, now codified by AB 5, a worker is presumed to be an employee rather than an independent contractor unless the hiring entity can establish the following conditions are satisfied:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

• The worker performs work that is outside of the usual course of the hiring entity’s business;

• 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. 

 If the worker does not meet all three conditions, then the hiring entity must classify the worker as an employee. This standard of proof is stricter than both the “right to control” test under Borello and the federal guidelines regarding independent contractor status.

Exemptions from the ABC Test

While AB 5 greatly expands the applicability of the Dynamex standard, the legislation exempts certain industries and professions from the ABC Test. For example, the exemptions include physicians, surgeons, dentists, lawyers, real estate agents, architects, engineers, accountants, and hairstylists. AB 5 also exempts “professional services,” defined as individuals who maintain business locations, have a business license, set or negotiate their rates and hours, and customarily engage in the same type of work under contracts with other entities. Additionally, AB 5 states that if a court finds that the ABC Test cannot be applied to a certain situation, the determination of employee or independent contractor status should be conducted under the Borello test.

 Penalties for Misclassification

Although AB 5 carves out exemptions for approximately 50 industry-specific categories, industries that do not fall under one of the exemptions must be wary because the legislation codifies stringent penalties for misclassifying an employee. 

The new law empowers the California attorney general, city attorneys in large cities, and local prosecutors to seek injunctive relief against employers who fail to properly apply the ABC Test and misclassify their workers. The California Labor Commissioner can also assess civil penalties of between $5,000 and $25,000 for each willful misclassification of an independent contractor. Additionally, misclassified workers can seek back pay for unpaid wages or overtime, premiums for meal and rest breaks, or pursue a claim to enforce civil penalties (including attorney’s fees) under California’s Private Attorneys General Act.

What Should Businesses Do Now?

It is not as easy as A-B-C. While it remains to be seen how AB 5 will be interpreted and applied, there is no doubt that there will be a variety of legal challenges with the passage of this new law. Every business that operates in California should act now and evaluate its workforce to ensure compliance.