California AB5 Law & The Independent Contractor ABC Test

California AB5 Law & The Independent Contractor ABC Test

The California Supreme Court issued a ruling last week that the Dynamex ABC rule of determining employee status would be applied retroactively. This means that any pending cases regarding employee status and the dispersal of benefits will be judged based on the California ABC rule, and not the Borello Multifactor Test that was in place before the ABC rule. This ruling has stunned California employers, leaving many to rethink how their businesses operate. Read on to find out what this means for you as a worker or an employer. For any other questions about employment and California law, click here.

California’s Wage Orders

Before diving into the significance of AB5, it is important to understand the California wage orders. The California wage orders provide employment rules that employers in the state must put in place at their businesses. They are the minimum standard that must be met by an employer.The wage orders call for different benefits for different categories or types of industries and jobs. California wage orders explain the rules about topics like:

  • Minimum wage
  • Overtime wages
  • Time and pay reporting
  • Vacation
  • Paid sick time
  • Record keeping
  • Meal breaks
  • Rest periods
  • Hours
  • Working conditions
  • Food and lodging
  • Uniforms and equipment, etc.

If a worker is legally categorized as an employee of a company, the wage orders determine the minimum benefits the worker is entitled to. If the worker is categorized as an independent contractor, they fall outside of the wage order’s protections. This obviously makes a big difference to corporations that rely on independent contractors not needing health insurance or unemployment insurance to keep costs low. So the question must be asked, how does one determine whether a worker is an employee or an independent contractor? Before AB5, the courts used the Borello Multifactor Test.

Borello Multifactor Test

Prior to the Dynamex case, the rubric for determining if a worker was an employee was the Borello Multifactor Test. This was established in 1989 as a result of a case titled S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations. It is a list of factors used to determine if a worker is an employee or an independent contractor, and no one factor is weighed as a “main” factor. The factors considered are:

  1. Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
  2. Whether the work is a regular or integral part of the employer’s business;
  3. Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
  4. Whether the worker has invested in the business, such as in the equipment or materials required by their task;
  5. Whether the service provided requires a special skill;
  6. The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
  7. The worker’s opportunity for profit or loss depending on their managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job;
  11. Whether the worker hires their own employees;
  12. Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract;
  13. Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship).

All of these factors were considered, and in different cases brought up since 1989, different factors had been given different priority. This made it difficult to know, without a lawsuit, how the Borello Multifactor Test would be applied when a new industry arises. With the Dynamex case, the court abandoned the Borello Multifactor Test and came up with new parameters.

Dynamex and the ABC Test

With Dynamex v. Superior Court, the court ruled that instead of a worker being considered an independent contractor by default, it’s actually the other way around. A worker is supposed to be considered an employee by default, with the impetus for arguing contractor status landing on the employer.

With California Assembly Bill 5 (AB5), the Borello Multifactor Test is rendered obsolete, and a company will now need to use the “ABC” test to argue for a worker’s independent contractor status.

Under the Dynamex ABC test, for a worker to be classified as an independent contractor a hiring entity must first prove the following:

  • (A) The worker is free from the control and direction of the hirer in connection with the performance of the work, practically and in the contractual agreement between the parties.
  • (B) The worker performs work that is outside the usual course of the hiring entity’s business.
  • (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity/company.

What Is A Gig Worker?

AB5 affects all industries, but the biggest ripple of alarm is being seen in companies that rely on “gig workers;” that is people who provide services on-demand that exist outside of a traditional company structure. Gig workers are generally temporary workers who are lightly screened and are not given any assurances as to the rate and frequency of their contracted jobs. They rarely have a supervisor or management structure, are not privy to health or unemployment insurance, do not get paid vacation, or any of the other minimum benefits afforded to “employees” thus saving the gig task digital platform loads of money on overhead, training, and office space.

For example, someone who takes $10 to hang up a mirror for you, but whose career is not “Mirror Installer” would be considered a gig worker. You are not expected to pay into that person’s health insurance. Your contract exists only for the life of the job. When the mirror is hung, there is no longer any contract of work between you. Today, nearly 8% of Americans have made money by taking on a job or task from a digital platform (such as Uber, Lyft, Fiverr), the traditional marker of a gig worker.

What Does AB5 Mean For Gig Economy Workers?

For people known as gig workers that will now be categorized as employees, including nearly 2 million California workers who will no longer be considered independent contractors, they will now be entitled to basic employee rights as contained in the California Wage Orders.

Under AB5, employees are now entitled to benefits including:

  • A minimum wage
  • Unemployment insurance
  • Workers’ compensation
  • Paid sick leave and paid family leave
  • Expense reimbursement
  • Freedom to join a union

What Workers Are Exempt From AB5 Benefits?

After AB5 went into effect, there were many employment sectors that fought back, leading to a wide range of exemptions to be put into place. AB 2257 expands the scope of exemptions of AB5. Workers who fall into an exemption need not fulfill the ABC requirements, but rather the previous Borello factor test.

The following are examples of workers that need to satisfy only the Borello test to be considered independent contractors:

  • Physicians, including surgeons, dentists, psychologists, veterinarians
  • Insurance brokers, underwriters, premium auditors, risk managers
  • Lawyers
  • Architects, landscape architects, and engineers
  • Private investigators
  • Accountants
  • Registered securities broker-dealers and investment advisers
  • Direct sales salespeople (must not be paid by the hour and have written IC contracts)
  • Manufactured housing salespersons
  • Competition judges, including amateur umpires and referees.

In addition, certain professional service providers, such as those offering HR, graphic design, photography, cosmetology services, and a slew of others, must meet the following six conditions to be considered an independent contractor.

The worker can classify as independent if they:

  • Maintain a separate business location;
  • Have a business license for any project that will exceed six months;
  • Negotiate their own rates;
  • Set their own hours;
  • Are engaged in an independently established business of same work;
  • Exercise discretion and independent judgement for the services being performed.

Who does that leave? Well, it’s hard to say. With the exemptions, it seems like few occupations are actually covered by AB5 except for gig drivers, like those employed by Lyft and Uber, essentially the types of workers AB5 was created to protect. But wait! Those two companies teamed up to get California Proposition 22 on the ballot in the 2020 election, which would grant a further exemption for their drivers.

California Proposition 22

In November of 2020, California Proposition 22 was passed, with a 58% approval rating, making workers at Lyft, Uber, Doordash, Instacart, and the like exempt from the AB5 parameters. These workers will continue to be independent contractors, and thus outside of the protections of the wage orders. CP 22 does grant more benefits for these affected workers than is required, but not as much as if it hadn’t passed. Critics of CP 22 say that it basically undermines AB5, leaving it mostly powerless.

Are you confused? You’re not alone. With the amendments to AB5 passed by AB2257 and CP 22, it can be difficult as an employer or a worker to know how to stay in compliance with California employment law. Contact Berberian Ain LLP, employment law specialist, to determine where you stand in all of this. Make sure you’re getting the benefits you deserve, or staying in compliance and avoiding costly penalties, by requesting a free consultation from Berberian Ain LLP.

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