On January 1, 2020, Assembly Bill 5 (AB5) became the law on how employers classify workers as employees or independent contractors in California.  AB5 compliance is now a serious concern for California employers.  The law enacts the ABC test from Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, leaving employers with independent contractors scrambling to determine whether their independent contractors’ worker classifications will now be viewed differently.  Further, continuing challenges to the law and ongoing attempts by legislators and others to refine the statute create uncertainty for employers as to how to proceed.

Why Defining AB5 Compliance Is Difficult

California employers had almost two years under Dynamex to achieve compliance with that sudden change in worker classification law.  AB5 may not seem much different, but its reach is much broader.  Specifically, Dynamex applied only to California wage orders and regulations, but AB5 makes the new ABC test applicable to all California Labor Code violations involving wage orders and to the California Unemployment Insurance Code.

The codified Dynamex ABC test is difficult to apply in part because it’s new and untested.  However, it would be easier to apply if it weren’t also in flux.  Continuing challenges to the law, attempts to add exemptions for certain types of workers and questions about retroactivity have California employers struggling to understand what AB5 compliance actually means.

Legal Challenges Make AB5 Compliance a Challenge

The enactment of AB5 upends the gig economy that has grown exponentially in recent years.  Companies like Uber and Lyft rely heavily on independent contractors in their workforces.  Reclassifying such a large number of independent contractors as employees would require the companies to pay Social Security and payroll taxes as well as unemployment insurance and workers’ compensation insurance.  The added costs might make their business models unworkable.

Uber and Postmates, another business that relies on independent contractors, have filed a federal suit challenging the constitutionality of AB5.  They are also lobbying the California State Legislature for changes to the law and collecting signatures for a ballot proposition regarding AB5 in the November 2020 election.

Employers are in a tough position.  They are bound to be AB5-compliant while court challenges and legislative measures are ongoing.  Businesses wading through these and related questions benefit from consulting an experienced California employer defense attorney.

How to Define Exempt Categories under AB5

The statutory ABC test law does not apply to California employers across the board.  AB5 includes four categories of exemptions for employment areas that need not use the test to determine worker classification:

  • Occupational exemptions, with examples including medical professionals providing care to or for a health care entity; professionals such as lawyers and accountants; registered securities entities and representatives; and real estate agents, direct-sales persons and commercial fishermen (until 2023).
  • Professional services exemptions, with examples including professionals in marketing and human resources as well as various other professions traditionally using independent contractors, such as barbers, cosmetologists and manicurists.
  • Referral agency exemptions, such as workers in home cleaning, moving, event planning, tutoring, pool or yard cleaning, graphic design or photography.
  • Construction industry exemptions, which require circumstances such as these:
    • The subcontract must be in writing and with a properly licensed subcontractor.
    • The subcontractor must be “customarily engaged in an independently established trade” such as plumber, carpenter or electrician.

Following the law’s passage, lobbyists and legislators are still pushing to change how to define exempt categories under AB5, so the statute bears watching on this element as well.

Exemption from AB5 application does not mean your business or workers are exempt from any evaluation.  Instead, worker classification in exempt areas is still governed by the former worker classification test established in S.G. Borello Sons Inc. v. State Department of Industrial Relations.  The Borello test considers 11 factors. The first factor, whether the worker is engaged in an occupation distinct from the company’s business, carries the most weight.

AB5 does not provide a one-size-fits-all approach to worker classification.  Additionally, lobbyists are pushing for more exemptions.  California businesses should continue to watch developments in this area to avoid unexpected noncompliance.

Is Dynamex Retroactive?

AB5 is silent on retroactive application. This may prompt the assumption that it should not be applied retroactively, but there is good reason to question that position.  The US Court of Appeals for the Ninth Circuit held in May 2019 that the standard set in Dynamex should be applied retroactively.  The circuit court later withdrew the opinion and certified the question to the Supreme Court of California, which granted review. 

If the Supreme Court determines that Dynamex should be applied retroactively, many California businesses could be on the hook for years of noncompliance.  Even if it answers the question under Dynamex, the court’s opinion might not be instructive as to whether AB5 is to be applied retroactively as well.  If the answer is yes, in either or both instances, then businesses across the state could be liable for untold amounts.

How to Navigate AB5 Compliance 

Understanding and complying with AB5 is a tall order for businesses given the newness of the statute.  Combine with that the shifting sands created by questions on constitutionality, exemptions and retroactivity, and employers are understandably unsure about how to proceed.

California employer defense attorney Susan A. Rodriguez helps businesses evaluate their potential liability under the ABC test and develop strategies for AB5 compliance under the unique circumstances of each business model.  A full-service employer defense firm, the Law Offices of Susan A. Rodriguez, APC have the resources and experience to help California employers with areas such as class action defense, DFEH complaints and PAGA.  Visit us at caemployerattorney.com for more information or call (213) 943-1323 for a consultation.

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