On September 18, 2019, California Governor Gavin Newsom signed legislation (A.B. 5) codifying the California Supreme Court decision in Dynamex Operations West, Inc. V. Superior Court of Los Angeles, where the court “cited the harm to misclassified workers who lose significant workplace protections, the unfairness to employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance.”

Specifically, the law amends the California Labor Code, the California Unemployment Insurance Code, and for the Industrial Welfare Commission’s wage orders (IWC wage orders), a person providing labor or services for remuneration will be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied (ABC Test):

1. The person 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 performance of the work and in fact;
2. The person performs work that is outside the usual course of the hiring entity’s business; and
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The law clarifies:

• Any exceptions to the terms “employee,” “employer,” “employ,” or “independent contractor,” and any extensions of employer status or liability, that are expressly made by a provision of the Labor Code, the Unemployment Insurance Code, or in an applicable IWC wage order, including, but not limited to, the definition of “employee” in subdivision 2(E) of Wage Order No. 2, remain in effect.
• That it does not apply to the following occupations, and instead, the determination of employee or independent contractor status for individuals in those occupations is governed by Borello (a multi-factor test):
  • A person or organization who is licensed by the California Department of Insurance pursuant to Chapter 5 (commencing with Section 1621 – insurance agents), Chapter 6 (commencing with Section 1760 – surplus line brokers), or Chapter 8 (commencing with Section 1831 – life and disability insurance analysts) of Part 2 of Division 1 of the Insurance Code.
  • A licensed physician and surgeon, dentist, podiatrist, psychologist, or veterinarian performing professional or medical services provided to or by a health care entity.
  • A licensed, practicing lawyer, architect, engineer, private investigator, or accountant.
  • A securities broker-dealer or investment adviser or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California.
  • A direct sales salesperson.
  • A commercial fisherman working on an American vessel. 
• That the holding in Dynamex does not apply to a contract for professional services, defined within the law, and instead the determination of whether the individual is an employee or independent contractor is governed by Borello if the hiring entity demonstrates that all of the following factors are satisfied:
  • The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. However, individual may choose to perform services at the location of the hiring entity.
  • If work is performed more than six months after the effective date of the law, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
  • The individual has the ability to set or negotiate their own rates for the services performed.
  • Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours.
  • The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
  • The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

Moreover, the law and Dynamex do not apply to:

• Specific occupations subject to the state’s Business and Professions Code (real estate licensee and repossession agency);
• A bona fide business-to-business contracting relationship under specific conditions;
• The relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry;
• The relationship between a referral agency and a service provider under specific conditions; and
• The relationship between a motor club with certificate of authority and an individual performing services pursuant to a contract between the motor club and a third party to provide motor club services utilizing the employees and vehicles of the third party.

The law also states that an action for injunctive relief to prevent the continued misclassification of employees as independent contractors may be prosecuted against the employer in court, in addition to any other remedies available.

The law is effective January 1, 2020.

Read the governor’s signing message and CA A.B. 5