California Law Provides New Test for Classifying Workers

On September 18, 2019, Governor Newson signed Assembly Bill No. 5 - legislation that changes the law in California for determining whether a worker should be classified as an “independent contractor” or as an “employee.” The law, which goes into effect January 1, 2020, codified the test formulated in the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, decided in May 2018. In that case, the California Supreme Court abandoned the long-established Borello test to determine whether a worker was properly classified. Under the prior test, courts looked to a number of factors that emphasized the employer’s ability to control the means and manner in which the worker engaged in their duties. Under the new “ABC test,” however, the California Supreme Court shifted the burden to employers to prove that workers are not employees. Under the new “ABC” test, an individual is presumed to be an employee, unless the company can prove all of the following: A) that the worker is free from 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) 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.

It is the second "B" prong of the test that has received the most attention from commentators, and has challenged employers doing business in California to determine how to grapple with the seismic change to the categorization of workers. The new law will fundamentally alter how courts approach a worker’s classification, since under the new test, a worker whose job responsibilities fall within the “usual course of business” of the employer may, depending on the circumstances, be re-classified as an “employee.” Courts have not yet determined how broadly or narrowly the “usual course of business” element will be defined. If the worker is re-classified, companies would have to account for workers' compensation, unemployment insurance, and social security taxes, and for some employees a host of wage-related issues, including overtime, meal and rest periods.

With the law going into effect in the new year, companies that partner with workers currently classified as “independent contractors” should consult with their employment attorneys or advisors to evaluate how best to determine whether the new law applies to those independent contractors, and if so, to ensure compliance with the new law.