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Governor Sounds Death Knell to Most Independent Contractors: The "ABC" Test is Official

By Procopio Senior Associate Annie Ellis and Associate Stephenie M. Alexander

As of January 1, 2020, many employers in California will find it almost impossible to make use of independent contractors. This process began last year with a landmark California Supreme Court decision establishing a three-pronged test to determine if a worker should be classified as an independent contractor or employee. That decision has now been codified, with Governor Gavin Newsom signing A.B. 5 into law on September 18, 2019. This sweeping bill affects most industries employing Californians (with a few notable exceptions).

The new law adopts the “ABC Test” established by the California Supreme Court in the Dynamex Operations West v. Superior Court, 4 Cal. 5th 903 on April 30, 2018. It also creates California Labor Code section 2750.3, which will require businesses to satisfy each of the three prongs of the “ABC” test for purposes of the California Labor Code (wage and hour), the California Unemployment Insurance Code (unemployment insurance claims), as well as the Industrial Welfare Commission Wage Orders (wage and hour). 

Notably, section 2750.3 makes no mention of compliance with any statutes relating to discrimination, harassment, and retaliation in the workplace. Such an omission will likely create confusion about standards for individuals asserting such claims and will probably result in litigation or an amendment to the statute in the future.

What is the ABC test? Well, it requires the hiring business to establish that an independent contractor:

    (A)  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;
    (B)  performs work that is outside the usual course of the hiring entity’s business; and
    (C)  is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the hiring business fails to establish one of these factors, the worker must be classified as an employee and receive all rights and benefits afforded under the panoply of California employment laws. These include minimum wages, meal and rest periods, unemployment insurance, paid sick leave, and many others.

Some California businesses received good news. The new law expressly exempts certain trades and professions from application of the “ABC” test, including lawyers, architects, engineers, private investigators, accountants, real estate brokers, physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians.  Those who are exempt may continue to rely upon the longstanding multi-factor standard known as “the Borello test” or “the Borello factors.”  See S. G. Borello & Sons, Inc. v. Department of Indus. Rel., 48 Cal. 3d 341 (1989).

In addition, workers performing a “contract for professional services” (e.g., marketing and human resources) may continue to rely on the Borello test provided that they meet an additional six criteria set forth in A.B. 5, including a separate business location from the hiring entity and a business license.

Given the numerous exemptions and additional tests for some of these exemptions, businesses should consult with qualified counsel, as the ABC test is not as simple as applying the three factors.

Although the new law takes effect on January 1, 2020, A.B. 5 states that it “does not constitute a change in, but is declaratory of, existing law,” which courts generally interpret as having retroactive effect. Fortunately, such retroactivity appears to include the newly clarified exemptions.

This sweeping legislation makes it even more important for businesses to work with qualified counsel in evaluating their current independent contractor relationships to ensure that their workers are properly classified.  Consequences of misclassifying workers are severe and include potential damages of unpaid wages (including minimum wage, overtime and double-time), meal and rest period violations, liquidated damages, interest, penalties and wage statement violations.  Businesses may also face steep fines and penalties (up to $25,000) and tax liabilities. 

If you have questions about this case, please contact Annie Ellis at 619.906.5741 or annie.ellis @procopio.com or Stephenie Alexander at 619.515.3204 or stephenie.alexander@procopio.com, or any member of the firm’s Labor and Employment Group.

 

Annie Ellis is a Senior Associate in Procopio’s Labor and Employment Law practice group. She primarily focuses on litigation, defending on behalf of employers. Most of Annie’s practice involves defense of wage and hour class actions and representative actions and has significant experience implementing aggressive and early defense strategies. Annie also represents employers in single- and multi-plaintiff actions involving discrimination, harassment, retaliation, wrongful termination, unfair competition, breach of contract, and other employment claims.

Stephenie Alexander is an Associate in Procopio’s Labor and Employment Law practice group. She primarily focuses her practice on counseling charter schools, public agencies and private entities to assist with compliance issues and the mitigation of risks of potential claims and litigation. Representative counseling matters include, but are not limited to, hiring and payroll practices, employee classifications, harassment/discrimination claims, leave laws (FMLA/CFRA/PDL/ADA/PSL and others), workplace investigations and terminations.