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California’s End to the Independent Contractor?

Author: Kyle R. Maland

Guest Editor: Aydin Emami

September 11, 2019 10:00am

Businesses on Edge over AB 5

The battle over the controversial decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles rages on in the California Senate via California Assembly Bill 5 (“AB 5”). AB 5, a sweeping bill backed by California labor unions, would make it much harder for California employers to classify employees as independent contractors, a common practice that has allowed in part certain gig economies to flourish. AB 5, a groundbreaking labor bill making its way through the state Senate, initially passed the California Assembly on May 16, 2019. AB 5 would redefine the definition of “employee” in California, which would require California employers to comply with comprehensive labor code provisions governing wages, overtime, meal and rest breaks, employee benefits, and numerous other aspects to an employment relationship.

Dynamex Changed the Definition of “Employee” 

In Dynamex, the California Supreme Court moved on from the traditional Borello test in favor of the ABC test, specifically for purposes of governance under the California Wage Orders,  which provide minimum wage, maximum hour, and working condition requirements for specific industries. The Dynamex court analyzed the meaning of the term “employ,” defined in Wage Order 2 as “means to engage, suffer, or permit to work.” In seeking to redefine “employ,” the court adopted the ABC test, which presumes all workers are employees unless three conditions are met:

(A) The individual is free from control and direction in connection with the performance of the service, both under his or her contract for the performance of service and in fact; and

(B) The service is performed outside the usual course of the business of the employer; and

(C) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as those involved in the service performed.

The “A” factor regards the “right” of the employer to control the employee, which mimics the language from the Borello Test. However, the “B” factor requires an examination of whether the employee performs his or her job distinctly independent from the usual course of business conducted by the employer. A recent Court decision used the following example: If a bakery hires a cake decorator to work on a regular basis, then the cake decorator is likely working within the bakery’s “usual business operation,” and thus would be classified as an employee. Whereas an electrician hired to work at a bakery, would likely be viewed as not working within the bakery’s usual course of business and therefore would not be viewed as an employee. The “B” factor analyzes the comparative nature of roles performed by businesses and workers.  The “C” factor looks at what usual steps were taken to establish and promote each independent contractors’ independent business—for example, through incorporation, licensure, advertisements, and/or routine offerings to provide the services of the independent business to the public, or to a number of potential customers.

Dynamex places the burden on businesses who utilize independent contractors to establish their own separate and distinct business, providing services to the general public, or face the penalties associated with misclassifying employees, which can be substantial.

What does AB 5 Provide for Certain Businesses?

AB 5 codifies the ABC test in Labor Code section 2750.3 by applying its factors across all provisions of the California Labor Code, Wage Orders, and Unemployment Insurance Code. Section 2750’s express language requires satisfaction of the identical factors contained in Dynamex’s ABC test. Importantly, the scope of the ABC test exceeds that of Dynamex by applying the test to all Labor Code provisions, not just the Wage Orders. Notably, there is a  sizable list of occupations—including insurance brokers and agents, doctors, securities brokers, independent hair stylists, and certain professional services providers—which would be excluded. The list of exceptions continues to grow and change, as the bill makes its way through the California Legislature.

The 9th Circuit Punted “Retroactivity” of Dynamex to the California Supreme Court

While AB 5 has been making its way through the California Legislature, the Ninth Circuit reversed course on its recent decision in Vazquez v. Jan-Pro Franchising International, Inc. In Vazquez the Ninth Circuit held, California law required retroactive application of the Dynamex standard, which would have resulted in the application of the ABC test to misclassify cases going back four years under the statute of limitations under California’s Unfair Competition Law, potentially exposing employers to substantial liability for unpaid benefits, wages, and/or penalties. On July 22, 2019, the Ninth Circuit withdrew the Vasquez decision and certified the issue of whether the ABC test promulgated in Dynamex would be applied retroactively. While the withdrawal is a win for California employers, it may be a temporary one because Dynamex suggested the ABC test was a clarification of existing law rather than a departure. The California Supreme Court denied a petition for rehearing that sought clarification to the issue of retroactivity.

What can Business Take Away from AB 5 if it is Passed?

Though the law has not yet passed in legislature, all businesses which currently utilize independent contracts may be affected by the comprehensive application of the ABC test. The measure could redefine what it means to be an “employee” in California. The law would rewrite the rules of many of California’s gig economies, especially those in the app-based services industries, delivering food or transporting people. With the issue of Dynamex’s retroactivity stalled for now, employers should remain cognizant of the uncertainty surrounding both AB 5 and its prospective retroactive application. While continuing to analyze the application of the ABC test to all of their independent contractors on a case-by-case basis, employers should keep any eye toward the changing climate of both the California legislature, and Supreme Court.

 

For questions on employment related matters, please contact Kyle R. Maland, Esq. at kmaland@tysonmendes.com.

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