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BREAKING NEWS: Many Workers Now Classified as Employees, Not Independent Contractors

On September 18, 2019, California Governor Gavin Newsom signed into law A.B. 5, codifying a tighter standard of rules for classifying a worker as an independent contractor. The new standard, known as the Dynamex standard, codifies and expands the earlier California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles. It replaces the former Borello test, and puts in place a more simple three-pronged ABC test. The significant effect is that many workers in California will now be classified as employees instead of independent contractors (also informally known as “1099” workers). This change is one of the most significant disruptions to California employment law in decades. The law has now gone into effect as of January 1, 2020.


The new law is convoluted, and has numerous exceptions for various professions, as discussed in further detail below. To further complicate matters, the law codifies Dynamex for purposes of claims made under the California Labor Code, Unemployment Insurance Code, and wage orders, but curiously does not mention the California Government Code, under which workers may seek redress for harassment and discrimination, among other things.


In addition, the newly created exemptions to the ABC test will apply “retroactively to existing claims and actions to the maximum extent permitted by law.”

In order to ensure that your company’s workers are properly classified (in order to avoid substantial fines and expensive misclassification lawsuits), contact a qualified employment law attorney as soon as possible to ensure you are complying with the law and following the new rules.


What Is the Potential Impact of This Change?


According to the LA Times, “State Capitol Democrats and organized labor say their new ‘gig’ law will correct the misclassification of 1 million California workers who are falsely deemed independent contractors.”


Others disagree: according to labor lawyer Brad Shafer, “A problem with AB 5 is some people got exemptions because they had political juice and other people didn’t. This is a legal standard that forces people who want to be independent contractors to be classified as employees. Take any performer who comes on stage at Staples Center. That entertainer would arguably be an employee of Staples Center. The performer is providing entertainment, and that is the business of Staples Center.”


These changes can continue to impact the Golden State’s desirability as a place to do business for many employers. For example, according to Richard Burgess, who heads the American Association of Independent Music, says, “this could have a big impact on the California recording industry. Already, we’re hearing labels say, ‘Oh, well, we’re not going to do anything in California anymore.’ They don’t want to be working where costs go through the roof.” For some employers of gig workers, this may wipe out their business model as they add additional costs and compliance measures.

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Gig companies such as Uber and Lyft vow to continue to fight, even by attempting to get a ballot measure before the California electorate. Uber, Lyft and DoorDash have contributed $30 million apiece to a fund to work toward placing a measure on the November 2020 ballot. While the text won’t be written until next month, it’s likely to seek to create a network driver category of independent contractors with a wage floor and some benefits. They are pledging to fight this law tooth-and-nail because if Uber and Lyft must now treat their California drivers as employees, it could cost Uber $500 million a year, and Lyft $290 million a year, according to a Barclays analysis.


**UPDATE**

Late Monday, December 30, 2019, Uber and Postmates filed a lawsuit against California, seeking preliminary and permanent injunctions, in an effort to fight AB 5. The two companies, along with Lyft, Instacart and DoorDash, have also put more than $100 million into a campaign to try to bring the issue before California voters in November 2020. The suit claims new law violates constitutional guarantees of equal protection and due process. Read More Here.


For the average employer, adding benefits such as minimum wage, workers’ compensation, unemployment insurance, expense reimbursement, paid sick leave and paid family leave, and half of employees’ Social Security tax could add 30% to labor costs.

The New Labor Code

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The revised California Labor Code Section 2750.3 codifies the California Supreme Court’s 2018 decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, which established a streamlined test (known as the “ABC test“) for determining whether a worker is an employee or independent contractor. Under the “ABC test,” the vast majority of workers will be deemed employees for wage order purposes (with the exceptions listed below). This change is projected to cost companies billions of dollars as they now have to provide worker’s compensation insurance, overtime, paid sick leave, and other benefits to their newly-classified employees. They will also have to prepare and maintain significant paperwork to evidence compliance with California employment law.

While Dynamex has been the law in California for more than a year, many companies were waiting for more assurance that they would need to make the change before making the investment in doing so, but now is the time to act.

All three elements must be met to allow an employer to classify their worker as an independent contractor:

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  1. The business is not able to control or direct what the worker does, either by contract or in actual practice;

  2. The worker performs tasks outside of the entity’s usual business; and

  3. The worker is engaged in an independently-established trade, occupation, or business.

The Previous Standard: Borello


The Borello test was the standard until the California Supreme Court over-ruled it in April 2018. The principal factor of the Borello test is whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” There were nine additional guiding factors that helped the courts determine the status of the worker, but none as definite or binding as the new Dynamex standard. However, if the profession is included in one of the professional carve-outs listed below, it would not be evaluated under the Dynamex analysis, but rather, it invokes the more involved Borello analysis, under which the following multiple criteria are evaluated:

  1. Right to discharge at will, without cause;

  2. Whether the one performing the services is engaged in a distinct occupation or business;

  3. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

  4. The skill required in the particular occupation;

  5. Whether the principal or the worker supplies the instrumentalities, tools and the place of work for the person doing the work;

  6. The length of time for which the services are to be performed;

  7. The method of payment, whether by the time or by the job;

  8. Whether or not the work is part of the regular business of the principal; and

  9. Whether or not the parties believe they are creating a relationship of employer-employee.

Arguments Against Workers Becoming Employees

Uber has already positioned itself as exempt from the law, claiming that it is a technology, not a transportation, company. However, that argument was rejected by the U.S. District Court for the Central District of California in 2015 in O’Connor v. Uber Technologies Inc., 82 F.Supp. 3d 1133 (2015).


Uber’s self-definition as a mere “technology company” focuses exclusively on the mechanics of its platform (i.e., the use of internet-enabled smartphones and software applications), rather than on the substance of what Uber actually does, which is to enable customers to book and receive rides). In fact, Uber does not simply sell software; it sells rides.


According to the O’Connor Court, “Uber is no more a ‘technology company’ than Yellow Cab is a ‘technology company’ because it uses CB radios to dispatch taxi cabs, John Deere is a ‘technology company’ because it uses computers and robots to manufacture lawn mowers, or Domino Sugar is a ‘technology company’ because it uses modern irrigation techniques to grow its sugar cane. …[It] is clear that Uber is most certainly a transportation company, albeit a technologically sophisticated one…. Even more fundamentally, it is obvious drivers perform a service for Uber because Uber simply would not be a viable business entity without its drivers.”


Uber has stated in its initial S-1 form for an initial public offering that it “believe[s] that drivers are independent contractors because, among other things, they can choose whether, when, and where to provide services on [its] platform, are free to provide services on [its] competitors’ platforms, and provide[s] a vehicle to perform services on [its] platform.”


Exceptions to the New Standard for Certain Licensed or Registered Professionals Occupations and Professions, Including Certain Licensed or Registered Professionals

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The Borello standard will still apply to the numerous and various carve-outs to the Dynamex standard, as outlined in A.B. 5, meaning that they can still be classified as independent contractors. These include, among others,

  1. Licensed insurance agents,

  2. Certain licensed health care professionals,

  3. Registered securities broker-dealers or investment advisers,

  4. Direct sales salespersons,

  5. Real estate licensees,

  6. Commercial fishermen,

  7. Workers providing licensed barber or cosmetology services, and

  8. Others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

Other exemptions include licensed practicing lawyers, architects, engineers, private investigators and accountants.


Exceptions for Professional Services in Marketing, HR Administration, Graphic Design, Fine Art, Photography, Photojournalism, Freelance Writing, Grant Writing and Editing