September 13, 2019
California legislation reduces the population of workers that can be classified as independent contractors
On September 11, 2019, the California Senate passed legislation under AB-5 to codify the California Supreme Court decision in Dynamex and expand and clarify its application. This bill would significantly impact all industries that customarily engage independent contractors; however, it is widely believed that it would have the greatest impact on the gig economy (e.g., rideshare and delivery drivers). Governor Newsom has signaled his support for the bill and is expected to sign it into law in the coming days.
Prior to April 30, 2018, and for most matters before the California Division of Labor Standards Enforcement, depending on the remedial nature of the legislation at issue, the "multi-factor" or the "economic realities" test was applied under the California Supreme Court case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341 (Borello). In applying this economic reality test, the most significant factor considered was whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker, both as to the work done and the manner and means in which it is performed. There were an additional 11 factors also considered.
On April 30, 2018, the California Supreme Court issued Dynamex Operations West, Inc. v. Superior Court of Los Angeles, a landmark decision in which the Court created a presumption that a worker who performs services is an employee, not an independent contractor, and adopted a new worker classification standard. The result of the Dynamex case was to replace the Borello standard with the new "ABC test." The Dynamex holding was narrow in its application as it was limited to wage orders that were issued by the Industrial Welfare Commission.
For unemployment and disability insurance purposes, whether a worker is an employee or independent contractor is currently determined by applying factors contained in common law or employment and statutory provisions of the California unemployment insurance code. The California Employment Development Department provides a questionnaire in DE-38 for this purpose.
Key provisions under California AB-5
Effective date under AB-5
California AB-5 provides that the codification of the ABC Test is not a change in law, but rather declaratory of existing law and should apply retroactively to existing claims to the extent permitted by law.
Generally, and except where otherwise noted within the law, the other provisions of AB-5 are effective with work performed on or after January 1, 2020.
Any worker who is an employee by application of this law is not required to be covered by worker's compensation insurance until July 1, 2020. (AB-5 Assembly floor analysis, 9-10-2019.)
Ernst & Young insights
Tightening the worker classification rules so that more workers are eligible for benefits, like unemployment insurance, and protections, like minimum wage and overtime, is something other states are also considering (e.g., Alaska, New York and Oregon). There are also federal proposals similar to California AB-5 being promoted by federal lawmakers with an emphasis of giving gig workers the right to union representation.
California AB-5 and similar legislation are likely to face fierce challenges from businesses reliant on gig workers, making the outcome uncertain.
Finally, implementation of the law will be complex, requiring detailed guidance from the California agencies concerned with worker classification.
In the meantime, businesses will need to consider the employment tax and human resources policy changes that will be necessary to comply with California AB-5 once enacted.
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