In April 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, which established a new legal standard for classifying workers as employees or independent contractors for the purposes of the wage orders adopted by California’s Industrial Welfare Commission. The Court replaced the almost 30-year-old Borello test in favor of a more worker-friendly standard that presumes all workers are employees instead of contractors and places the burden on the hiring business to show that the independent contractor classification is proper under the newly adopted “ABC test”.
On September 10, 2019, the California Senate passed Assembly Bill 5 which seeks to codify the Dynamex ABC Test into law and expand its reach beyond wage orders to all provisions of the California Labor Code and the Unemployment Insurance Code.
Under the ABC test, a business must establish each of the following three factors to properly classify a worker as an independent contractor:
- The worker is free from the control and direction of the hirer in connection with the performance of the work; and
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Although certain specific industries and professions would be exempt from the proposed legislation, this new framework makes it significantly more difficult for companies to classify workers as independent contractors because failure to establish any one of the three factors results in a determination that the worker is an employee as a matter of law. In particular, prong B of the test is especially problematic for any business that uses independent contractors to provide or deliver its core product or service. For example, the Dynamex court stated that although a plumber hired by a retail store to repair a bathroom leak is not performing work that is part of the store’s usual business and would therefore be considered an independent contractor, a seamstress sewing at home using materials provided by a clothing manufacturer is part of the manufacturer’s usual business operation and would probably be considered an employee.
If a worker is classified as an employee, the employer is responsible for paying Social Security and payroll taxes, state employment, unemployment and disability insurance contributions, providing workers’ compensation insurance, and complying with state and federal statutes governing the wages, hours and working conditions of employees. Failure to comply with such responsibilities due to misclassification of workers can result in significant legal exposure and monetary penalties.
Consequently, if signed into law by Governor Newsome as expected, Assembly Bill 5, will have a significant impact on employers and workers in all California industries as well the manner in which businesses structure their operations. Any business that utilizes independent contractors should consult with legal counsel to consider whether those workers are either exempt from legislation or properly classified under the ABC test to ensure full compliance with the law and avoid significant penalties.