UPDATE: Death of the Independent Contractor? The Dynamex Decision and Beyond

Filed under: Business Law

Last month we discussed the landmark California Supreme Court decision in Dynamex Operations West v. Superior Court of Los Angeles (“Dynamex”), and the pending legislation that attempts to codify the controversial decision by changing how a hiring company would determine whether a worker is an independent contractor or an employee.

On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (“AB 5”) shortly after it passed the California Assembly and Senate. As we discussed last month the new law creates significant restrictions on how California employers classify their workers. The new law takes effect on January 1, 2020.

AB 5 provides that the factors of the ABC test be applied in order to determine the status of a worker as an employee or independent contractor for all provisions of the Labor Code and the Unemployment Insurance Code, except if a statutory exemption exists. The new law currently exempts a number of occupations from the new statutory scheme, including doctors, securities broker-dealers, insurance agents, accountants, barbers, hairstylists, lawyers, engineers, architects, and a number of other professions.

To refresh your understanding, the controversial new law sets forth the intent of the Legislature to codify the decision in the Dynamex case and clarify its application. In Dynamex, the court abandoned the long-standing “control test” instead applying a much stricter “ABC test” used to determine whether a worker is properly classified as an independent contractor.

Under the ABC test, a worker will be deemed to be an employee for wage order purposes, unless the putative employer proves:

A) that 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;

B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Importantly, each of these requirements needs to be met in order for the putative employer to rebut the presumption that a worker is an employee. It is also important to keep in mind that the Dynamex ruling is being applied retroactively, which means that the ABC test will be applied to cases going forward, as well as to disputes dating back to before the new test was articulated.

Despite aggressive public campaigns to defeat the bill, major gig employers like Uber and Lyft will now have to comply with AB 5. In fact, it is estimated that many thousands of California workers across hundreds of industries throughout not only the “gig” economy but elsewhere will now be classified as employees. Therefore, beginning in January 2020, not only will these workers be reclassified as employees, but employers will be required to comply with minimum wage and overtime rules, and provide certain worker compensation protections, including paid sick leave and a myriad of other employment benefits.

Just as the application of the Dynamex applies retroactively to existing court claims, the new law will also apply retroactively to existing misclassification claims. Misclassification is a very expensive mistake. Regardless of the employers’ size, AB 5 applies to all California employers. Now is the time for employers to take action to change worker classification, conduct employment audits and revise employment agreements.

Before the new law goes into effect, all employers who currently utilize independent contractors should contact an attorney to review their current situation and make the necessary changes relative to their workforce classification.

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