The California legislature set its sights on limiting employers’ use of independent contractors in the gig economy, and it will have a dramatic impact for all employers.  AB 5, which codifies the California Supreme Court’s ABC test for independent contractors as set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018), was signed into law by Governor Newsom on September 18, 2019 and will become effective on January 1, 2020.  Here are five key issues California employers must understand about AB 5:

1. AB 5 codifies the California Supreme Court’s ruling in Dynamex.

The California Supreme Court ruled in Dynamex that in order for a worker to be properly classified as an independent contractor, the company must establish that the worker meets the ABC test:

• Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
• Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
• Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

A detailed article about the ruling in Dynamex v. Superior Court can be read here.

2. By codifying Dynamex, the bill expands the reach of the ABC test.

The California Supreme Court’s ruling in Dynamex held that the new ABC test applied to California’s wage orders.  AB 5, in codifying the ruling, applies ABC test to workers not just for wage order purposes, but also under the California Labor Code and the Unemployment Insurance Code.

3. AB 5 does not apply to certain types of workers.

The bill exempts certain types of workers, such as certain investment advisers, workers providing licensed barber or cosmetology services, licensed physicians and surgeons, licensed attorneys, dentists, architects, engineers and accountants.  Because the bill carves out these professions from the bill, the nine-factor test set forth in Borello & Sons, Inc. v. Department of Industrial Relations will apply in determining whether a worker is either an independent contractor or an employee.

Of primary note, the bill does not exempt rideshare companies, such as Uber or Lyft.

4. There are steep penalties for the misclassification of a worker as an independent contractor.

In addition to Labor Code violations for items such as unpaid wages, missed meal and rest breaks, and overtime that would be available to a worker misclassified as an independent contractor, Labor Code section 226.8 also provides for significant civil penalties.  Labor Code section 226.8 provides that employers can be liable for civil penalties of $5,000 to $15,000 for each violation of “willful misclassification” of employees as independent contractors. In addition, if it is found that the employer has a pattern and practice of misclassifying independent contractors, the penalties can increase to a minimum of $10,000 to $25,000 per violation.

Labor Code section 226.8 imposes the penalties for a “willful misclassification,” which is defined as:

“Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.

5. AB 5 will impact the workforce as well as consumers in California.

Employees are provided additional Labor Code rights beyond those provided for independent contractors for items such as minimum wage, meal and rest breaks, and overtime pay.  However, independent contractors are permitted more control over their work schedules and how they carry out their duties, which many workers in the gig economy prefer.  If independent contractors are required to be reclassified as employees, companies will have more control over when and where the workers perform their duties.  Also, the additional costs associated with having workers treated as employees, such as providing paid sick leave benefits as required by the state and some local cities, will ultimately have to be passed on to consumers.  In addition, it is putting pressure on many industries to bring automation into the workforce quicker.