With details still being hashed out and the governor still in negotiations with powerhouse companies, the California Legislature has passed a bill expected to make the gig economy workforce more expensive to maintain.

The legislature passed Assembly Bill (AB) 5 late September 10, 2019, a bill that largely codifies the 2018 Dynamex Operations West, Inc. v. Los Angeles County Superior Court decision. That decision made it harder to justify classifying workers as independent contractors instead of employees.

Please review the LAWlert sent out to Guardian HR clients on 5/31/2018 by logging into the client portal at www.guardian-hr.com and accessing LAWlerts from the left menu: https://guardian-hr.com/urgent-ca-update-california-supreme-court-adopts-new-independent-contractor-test/

Dynamex and the new bill are putting major stress on businesses such as ride-share giants Uber and Lyft since they and other gig economy entities rely on the independent contractor model, which is a far less expensive way to staff their businesses than hiring employees who are eligible to form unions, collect benefits, and be covered under an array of state and federal laws.

AB5’s new test for determining employee status is based on a strict “ABC” test outlined in the Dynamex decision. Before Dynamex, businesses could use the less restrictive Borello test.

Although the bill will make it harder to justify an independent contractor classification for many businesses, it contains “a ton of exemptions” scheduled to roll out through 2023.

Employers need to take a careful look

Passage of AB5 “creates a brand-new ball game” related to independent contractors. Once it’s finalized, employers will have to look carefully at how the new statute will affect their workforce. Almost every workforce in the state will be affected in some way.

Dynamex and Borello tests

The Dynamex test presumes workers should be classified as employees unless a company can prove three factors:

(A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the work and in fact;

(B) The worker performs work that is outside the usual course of the hiring entity’s business; and

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The less stringent Borello test sets out a multitier group of factors that don’t all have to be met and generally are easier for companies to meet.

Ballot initiative possible

The new statute affects more than just wage and hour issues. Since it broadens the definition of employee, many more workers will come under laws such as Title VII of the Civil Rights Act of 1964 and other antidiscrimination laws as well as the National Labor Relations Act. Also, the state’s sexual harassment training requirements will cover workers who must be classified as employees under the new statute.

Both the federal and state governments have focused on misclassification of employees as independent contractors for the past decade, and California law includes a penalty for misclassification in addition to other potential liability. For example, a California employer faces liability for misclassification in addition to liability for not paying for workers’ compensation insurance and unemployment insurance on workers determined to be employees.

The legislature must finish its work before it adjourns on September 13, 2019. The governor has indicated he will sign the bill even as he remained in negotiations with gig economy companies. Even after the bill is signed, the issue may not be over since Uber and Lyft have put resources behind a possible ballot initiative to allow them to keep their independent contractor model.

Guardian HR Recommendation

All employers should reevaluate their independent contractor arrangements to determine if these might be misclassified. You can find helpful materials for this analysis by contacting your dedicated HR Consultant and by accessing the Forms Library in the client portal and viewing the folder “Independent Contractor”