California’s AB 5 Affirms “ABC” Test for Independent Contractors

tom wolfe headshot
Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

In a two-part article appearing in the Aug. 21 and Sept. 18, 2018 editions of CU Weekly,[1] we examined the California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (“Dynamex”).[2] Dynamex adopted the “ABC” test for determining whether a worker should be classified as an independent contract or an employee for purposes of wage order violations.  The California Legislature has now codified the Dynamex decision in Assembly Bill 5 (“AB 5”), scheduled to go into effect on Jan. 1, 2020. However, AB 5 also broadens the application of Dynamex to extend beyond violations of the state’s wage orders to cover more types of claims, while additionally narrowing the types of positions to which the ABC test applies and establishing new methods of enforcement.  Credit unions should review their independent contractor relationships to ensure that they still qualify under this newly codified standard.

Background
In the prior articles, we reviewed the then-current state of California law and the various tests used to determine independent contractor status in addition to the ABC test under Dynamex, including the multi-factor “Right to Control” test under S. G. Borello & Sons, Inc. v. Department of Industrial Relations (“Borello”),[3] the “Economic Realities” test, and the oft-used – and oft-amorphous – hybrid tests, combining portions of the Right to Control test with portions of the Economic Realities test.  However, the codification and expansion of the ruling in Dynamex unifies all California courts in applying the ABC test (absent an exemption) for purposes of claims under California wage orders, claims under the Labor Code, and claims under the Unemployment Insurance Code. [4]

The ABC Test
At the core of AB 5 is the ABC test, which states that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor, unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person 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) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.[5]

Thus, the court’s presumption is that the worker is an employee, and the burden is on the credit union to prove that the worker meets the above criteria to instead be classified as an independent contractor. AB 5 also provides that, if a court rules that the ABC test cannot be applied to a particular context (other than as a result of an express exception), then the determination of employee or independent contractor status will be determined using the Right to Control test in Borello.

Exceptions
AB 5 carves out numerous occupations that are exempt from the ABC test’s application.  For these exempt occupations, the multi-factored Right to Control test under Borello will still be applied. Those exemptions take up the bulk of AB 5 and include the following, subject to meeting certain specified condition: doctors, dentists, veterinarians, psychologists, lawyers, architects, engineers, marketing professionals, human resources administrators, travel agents, graphic designers, grant writers, fine artist, accountants, securities broker-dealers, investment advisors, insurance brokers, real estate agents, builders and contractors, freelance writers and photographers, licensed hair stylists and barbers, licensed estheticians, electrologists, and manicurists, private tutors, commercial fishermen, AAA-affiliated tow truck drivers. 

AB 5 also exempts bona fide business-to-business contracting relationships and referral agency/service provider relationships that meet specific requirements.

Application and Retroactivity
The extent to which AB 5 is retroactive is not entirely clear. AB 5 states that the application of the ABC test to wage order claims is declaratory of existing law, and that some provisions will apply retroactively to the maximum extent permitted by law. However, other provisions apply to work performed on or after January 1, 2020 for purposes of the Unemployment Insurance Code and all other provisions of the Labor Code. Regardless, an employer is prohibited from reclassifying an individual who was an employee on January 1, 2019, to an independent contractor due to the enactment of AB 5.

While credit unions were not the main target of the legislation, they will be affected, nonetheless.  Credit unions should examine their independent contractor relationships under the umbrella of the new framework that AB 5 creates to ensure that, if not exempt, they satisfy the ABC test. If not, those workers may need to be reclassified as employees. Misclassification puts credit unions at risk of defending claims from workers, either individually or on a class basis, with potential exposure for wage order violations and penalties under the Private Attorney General Act (“PAGA”). In addition, city attorneys and/or the state Attorney General may pursue an injunction.[6]  Credit unions are encouraged to work with legal counsel to answer any questions with regard to the proper classification of workers or for assistance with developing and reviewing independent contractor agreements.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

 

[1] See “Independent Contractor or Employee: You Don’t Make the Call,” CU Weekly, August 21, 2018 (Part 1 of 2) and September 18, 2018 (Part 2 of 2).

[2] See Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.

[3] See S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

[4] Notably, AB 5 does not extend the ABC Test to claims under the California Government Code or tort claims.

[5] California Labor Code § 2750.3(a)(1); California Unemployment Insurance Code § 621(b).

[6] AB 5 enables the California Attorney General, city attorneys, and local prosecutors to sue employers over violations as well as seek an order to force the employer to reclassify their workers appropriately.

Pin It