CA Legislature Finally Steps In…Effect of the codified and expanded “ABC” Independent Contractor Test
After two controversial Court decisions regarding the classification of independent contractors and when the test applies, the California Legislature finally stepped in and signed into law Assembly Bill (AB) 5.
In 2018, the California Supreme Court issued the landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles imposing a tougher legal standard classifying a worker as independent contractors by adopting the “ABC Test.” In May 2019, the Ninth Circuit Court in Vazquez v. Jan-Pro Franchising Int’l, Inc. held the “ABC Test” applied retroactively. The Ninth Circuit in July withdrew that decision and sent it back to the California Supreme Court to answer that question.
The California Legislature finally intervened on September 18, 2019, when Governor Newson signed AB 5 into law. AB 5 codifies and expands the “ABC Test” adopted by the California Supreme Court in 2018. The effect of this bill will make it more difficult for California businesses to classify workers as independent contractors. The ABC test presumes that a worker is an employee unless the hiring entity can establish that the worker:
A: is free from control and direction of the hiring entity in connection with the performance of the work, both under the relevant work contract and in fact;
B: performs work that is “outside the usual course of the hiring entity’s business”; and
C: customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed
Assembly Bill 5:
In addition to codifying the ABC Test adopted by the California Supreme Court, AB 5 retroactively applies the test to claims made under the Labor Code in order to enforce wage order claims. The test prospectively applies to all other claims made under the labor code and the Unemployment Insurance code. Further, AB 5 allows the statute’s broad list of exemptions to be retroactively applied.
What should your organization do?
1. Audit your independent contract agreements now
AB 5 has been signed into law and the retroactivity of that law has been codified. It is therefore critical to audit your existing independent contractor agreements to determine whether an exception may be applied retroactively. Several exemptions including, professional services and business-to-business exemptions may now be used to mitigate against future claims.
Misclassified workers can recover:
- Unpaid wages (i.e., overtime);
- Meal and rest period premiums;
- Unpaid business expenses; and
- Significant penalties (i.e., waiting time, wage statement, and potential Private Attorneys General Act—PAGA—penalties)
AB 5 gives the California Attorney General and certain city attorneys the authority to seek injunctive relief against offending employers to prevent the continued misclassification of employees.
2. Pay attention to exemptions
The exemptions, although broad, are limited. While several exemptions appear to apply to businesses on their face, the statute contains qualifications and standards that are difficult to satisfy. Even if an ABC Test exemption applies, the independent contractor arrangements will still need to satisfy the Borello Test—the test California courts utilized prior to Dynamex.
3. Joint employer test remains
The ABC Test should not apply to joint employer questions of liability which are governed by the United States Supreme Court’s decision in Martin v. Combs. AB 5 applies the ABC Test to the hiring entity—the direct hiring organization
AB 5 codified the “ABC Test” into law and answered the issue presented under Vazquez as to whether the test applies retroactively or prospectively. It is our recommendation that you review all independent contractor agreements with your employment attorney to ensure that your independent contractor agreements comply with the ABC standard and determine any exposure for liability.
To help mitigate gaps in insurance coverage, your attorney should also review your insurance policies. In general, most liability policies do not cover independent contractors. Below are a few policies that you should review with your attorney:
- Employment Practice Liability Insurance (EPLI) coverage does not provide coverage for wage and hour claims, however, some insurance carriers do provide a defense sublimit.
- Workers’ Compensation Coverage. Employers in California are required by law to carry workers’ compensation insurance. If your employees are not properly classified for workers’ compensation, your organization may face additional fines.
Always review your liability exposures with your employment attorney. Let us know if you have any questions regarding Employment Practice Liability Insurance or would like us to provide a quote with a wage and hour defense sublimit. We are here to help!
This article is to be used for informational purposes only and not to be construed as legal advice