A new California law, stemming from Assembly Bill 5 (AB 5), expands and codifies the California Supreme Court’s 2018 decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles, which we reported on previously. Under Dynamex, workers were presumed to be employees unless the company could show, pursuant to a three-factor test called the ABC test, that the workers were, in fact, independent contractors.

The Dynamex decision only applied the ABC test to the wage orders issued by the Labor Commissioner. AB 5, by contrast, is broader and will apply to the entire California Labor Code and the California Unemployment Insurance Code. This statute does not change the tests for determining worker status in matters of discrimination and retaliation under the California Fair Employment and Housing Act, workers compensation benefits, or other areas of employment law. The new law, which will take effect January 1, 2020, could have unforeseen consequences because a worker may need to be classified as an employee for wage and hour purposes, but could not be covered for workers compensation benefits or other benefits.

The ABC test specifies that in order to prove a worker is an independent contractor and overcome the presumption that the individual is an employee, the company has to prove:

• The individual is free from the control and direction of the company in connection with the performance of the work, both under the contract for the performance of the work and in fact.
• The individual performs work that is outside the usual course of the company’s business.
• The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.

The law also says that in those instances where the ABC test cannot be properly applied, the nine-factor test laid out in the California Supreme Court’s decision in Borello & Sons, Inc. v. Department of Industrial Relations will apply. The multi factor test focuses on the right to control. The law does not clarify when the ABC test could not be “properly applied.” Finally, AB 5 includes carve-outs for several professions—including but not limited to doctors, accountants, real estate agents, and architects—where the Borello test, rather than the Dynamex test, will apply.

AB 5 may also greatly expand the number of individuals who are eligible for employee benefits in California. Employers may be required to consider making benefit plan changes to clarify what definition of “employee” they will use and assess whether their administrative systems need updates or changes if they choose to use multiple definitions of “employee” for eligibility purposes. Employers would then need to determine if AB 5 requires them to extend coverage to all or part of this new employee population under company medical plans, 401(k) plans, severance, vacation, and FMLA. The costs of these additional benefits could be significant.

Although extending benefits coverage to this new employee population could be a significant financial burden, the costs of non-compliance could be higher. Intentional violations can result in civil fines of $10,000 to $25,000 per misclassified worker, along with back pay and other penalties.