The independent contractor / employee distinction is a vital one for businesses across California and the United States. “Employee” status confers many legal benefits that “independent contractor” status does not so confer. For example, only employees are subject to the California Labor Code and IWC Wage Orders, which govern matters such as minimum wage, overtime, and meal/rest breaks. Additionally, benefits such as paid sick days, family leave rights, workers’ compensation, disability insurance, and unemployment insurance all depend on an individual qualifying as an “employee.”
In 2018, the California Supreme Court issued its notorious Dynamex decision. (Dynamex v. Superior Court (2018) 4 Cal.5th 903.) In Dynamex, the Court adopted the “ABC Test” for determining whether an individual is an employee or an employer for purposes of the IWC Wage Orders. The ABC Test places “the burden on the hiring entity to establish that the worker is an independent contractor who [is] not intended to be included within” the coverage of the IWC Wage Orders. (Id. at 957.) In order to sustain its burden, the hiring entity must establish three factors:
(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; and,
(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.
California Assembly Bill 5 (“AB-5”) seeks to codify the 2018 Dynamex decision and its ABC test, and would “provide that for purposes of the provisions of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, a person providing labor or services for renumeration shall be considered an employee rather than an independent contractor unless the hiring entity” satisfies the ABC Test. AB-5 will apply the ABC Test to the vast majority of businesses, with limited exemptions.
Earlier this week, AB-5 passed in the California Senate. Governor Gavin Newsom has previously signaled his support for AB-5 in an OpEd piece in the Sacramento Bee (https://www.sacbee.com/opinion/article234624897.html).
AB-5 has the potential to significantly impact all businesses in California, especially those utilizing independent contractors. For example, Employers should immediately rethink classifying any individual as an independent contractor in light of Dynamex and AB-5. Misclassifying workers as independent contractors when they are, in fact, employees can result in costly litigation resulting in severe liability for businesses.
The attorneys at Sagaser, Watkins & Wieland PC are here to assist employers in making the crucial employee / independent contractor distinction. Our team of lawyers has an abundance of experience in litigating misclassification cases. Please contact our office at (559) 421-7000 if you are concerned about AB-5’s potential impact on your business operations.