On September 18, 2020, California Governor Gavin Newsom signed a new measure — Assembly Bill 5 — which will redefine how businesses classify their workers. Commonly known as “AB 5,” the new law seeks to codify the “ABC Test” for determining the existence of an employer/employee relationship. Simply put, the bill will make it much more difficult for businesses to utilize workers as independent contractors. The law will take effect on January 1, 2020, and will require many businesses, especially those in the so-called “gig economy,” to restructure their operations or transform workers into employees. The law contains no exceptions for franchisor/franchisee relationships and could potentially require reassessment of many such arrangements.
As we have previously reported, in April 2018, the California Supreme Court issued a sweeping ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which under certain circumstances eliminated a previous, more flexible multifactor inquiry for determining whether independent contractors were properly classified. For claims under the California Wage Orders, Dynamex instead adopted the ABC Test, which states that a worker is now considered an employee unless the alleged employer can satisfy all three of the following:
Dynamex left unanswered questions about its applicability to other state laws and whether the enforcement agencies could apply it retroactively. So, workers’ advocates and organized labor moved in aggressively to get the legislature to codify Dynamex and the ABC Test as the undisputed law of the state. In May 2019, the California State Assembly passed AB 5. The assembly’s Republican members, the California Chamber of Commerce, and gig economy companies like Lyft, Uber, and DoorDash opposed, yet in August 2019 the California State Senate approved the bill, and on September 11 the full assembly passed the final version of the bill.
The impetus for AB 5, Dynamex, only applied to California’s Wage Orders and, thus, was relatively limited in scope to minimum wage, overtime, and meal and rest break rules. AB 5, however, reaches further, subjecting alleged employers to liability for workers’ compensation coverage, unemployment insurance, paid sick leave, family leave, and other benefits. Further, workers who were formerly independent contractors (and certain franchisees) may now seek protection under the state’s antidiscrimination and harassment laws, and organize themselves into unions.
The final bill became somewhat of a demonstration of which industries had the most lobbying muscle and were best able to obtain exemptions from AB 5. Examples of those fortunate to obtain at least limited carve-outs are listed below:
Importantly, businesses that hire other businesses (i.e., vendors) are also in danger of liability under AB 5. A vendor’s employees could claim they are also the employees of the “contracting business,” under the bill’s definition, unless the contracting business can satisfy 12 requirements in the statute. Some of these requirements include 1) proof that the vendor provides the similar or same services to other clients, 2) the vendor providing its services directly to the contracting business and not its customers, and 3) the vendor advertising to the public. Finally, at least two courts have held that Dynamex’s ABC Test is retroactive, going back four years, while certain aspects of AB 5 are too.
Businesses face difficult decisions in the coming days, ahead of January 1. Should they reconfigure their operations in order to avoid liability under AB 5? Should they proceed with reclassifying their independent contractors as employees? Either choice presents a host of legal and technical issues that are best addressed on a case-by-case basis.
Please consult a Foley & Lardner LLP attorney so that we may assist with this important analysis and decision-making process.