California’s AB5 Codifies Stricter Rules for Independent Contractors – What Wine Industry Employers Need to Know

Farella Braun + Martel LLP

Farella Braun + Martel LLP

North Bay Business Journal - October 30, 2019

California Governor Gavin Newsom has signed into law AB5, codifying a new test for distinguishing employees from independent contractors.

While AB5 does not go into effect until January 1, 2020, it will apply retroactively to many claims. Wine industry businesses that have historically engaged independent contractors for winemaking, marketing/graphic design, human resources, and other types of work, should take a close look at those relationships and seek guidance on how to reclassify those workers if they do not meet the new legal criteria.

Dynamex Codified

AB5 adopts the test articulated in the California Supreme Court’s April 2018 Dynamex decision, which established a presumption that workers are employees unless the hiring entity demonstrates that the worker meets all these criteria:

(A) Is free from the control and direction of the hiring entity in connection with the performance of the work.

(B) Performs work that is outside the usual course of the hiring entity’s business.

(C) Is customarily engaged in an independently established trade, occupation, or business.

Dynamex had only expressly applied to claims arising under the state Wage Orders, which govern overtime pay among other pay requirements, leaving debate over the case’s application to other types of claims. AB5 expands the 3-part test—commonly known as the “ABC test”—to provisions of the Labor Code and Unemployment Insurance Code.

Importantly, AB5 declares that it does not constitute a change in, but rather is declaratory of, existing law with regard to violations of the Labor Code reflected in the Wage Orders. This includes claims relating to meal and rest breaks, overtime, and minimum wages, thus giving retroactive effect to those types of claims. All such claims effectively have a 4-year statute of limitations.

In short, AB5 raises the prospect of significant exposure for wine industry employers which use contractors who do not satisfy the new test, as those workers could potentially assert a variety of claims for unpaid wages and penalties. Likewise, the employers could face liability from state regulators.

Specified Exempted Occupations Still Get Borello Test

AB5 does have a silver lining of sorts: It exempts a variety of specified occupations, industries, and business relationships from the Dynamex test, though it does not automatically deem those exempted workers independent contractors. Rather, their status will be assessed under the more flexible multifactor Borello test.

Here are aspects of that test most relevant to the wine industry:

“Bona fide business-to-business contracting relationships” are exempted where a “business service provider” contracts to provide services to another “contracting business,” if the contracting business demonstrates that 12 criteria are all satisfied.

This exemption theoretically allows one entity (the contracting business) to use the services of a worker employed by another entity (the business service provider) and have that worker’s relationship with the contracting business be governed by the more flexible Borello test. But the following twelve criteria for the business service provider make satisfying this exemption difficult:

(A) Is free from the control and direction of the contracting business.
(B) Provides services directly to the contracting business rather than to the contracting business’s customers.
(C) Has a written contract with the contracting business.
(D) Has any necessary business license or tax registration.
(E) Maintains a business location separate from the contracting business.
(F) Is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) Actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the contracting business.
(H) Advertises itself to the public as available to provide the same or similar services.
(I) Provides its own tools, vehicles, and equipment to perform the services.
(J) Can negotiate its own rates.
(K) Can set its own hours and work location consistent with the nature of the work.
(L) Is not performing certain licensed construction work.

This exemption would be vintners’ best bet for evaluating whether winemakers can be classified as independent contractors. Most winemakers typically provide services directly to the vintner and not to the vintner’s customers, satisfying criterion (B). But the other criteria should be carefully assessed and may require extra steps by the winemaker to satisfy.

For example, if not already doing so, the winemaker should establish itself as a LLC with its own business address, employees, advertising, other contracting business clients, and equipment.

Workers operating under certain types of professional services contracts, including human resources administrators, marketing professionals, and graphic designers whom vintners commonly retain on a contract basis, are exempted—such that multifactor Borello test applies rather than the ABC test—if they meet certain sub-criteria:

(A) Maintains a business location separate from the vintner’s address.
(B) Has a business license, in addition to any required professional licenses or permits for their profession.
(C) Has the ability to set or negotiate their own rates.
(D) Has the ability to set his or her own hours, outside of project completion dates and reasonable business hours.
(E) 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.
(F) Customarily and regularly exercises discretion and independent judgment in the performance of the services.

What’s Next

Uber, Lyft, and DoorDash—gig economy businesses that were most notably omitted from the law’s exemptions—have jointly committed $90 million to financing a 2020 ballot initiative to overturn the law. Governor Newsom has said that, even after signing the bill, he will continue trying to negotiate a compromise that could create a third worker category somewhere between employee and contractor.

In the meantime, with AB5’s passage, vintners that rely upon independent contractors for such services as winemaking, marketing/graphic design, and human resources support will need to take a hard look at those classifications under the above criteria. That review may reveal the need to reclassify workers as employees, or alternatively, to implement structural or policy changes to bolster compliance.

Of course, vintners should also evaluate an effective communication strategy if and when they decide to reclassify workers under the new law—which may require different, but of course consistent, messages for employees, contractors, business partners, and the public.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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