How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law

Locke Lord LLP

The latest version of Assembly Bill 5, which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, is about to become law.  Dynamex created a so-called ABC test requiring companies to satisfy each of three strict requirements to establish independent contractor status, dramatically changing decades of settled law in California.  Prior to Dynamex, IC status was determined in that state by application of a multi-part test that the California Supreme Court had issued three decades earlier in the Borello case, which weighed and balanced a number of factors.  Essentially, Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might be operating in violation of the law.

Prior to this legislative initiative, all industries were covered by the Dynamex decision for so-called “wage order” claims.  However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses, as we noted in a blog post reporting on a case that delineated which types of claims were covered and which were not by the Dynamex.  AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims (as well as claims under the unemployment and disability benefits laws in California).  But it ended up becoming a lobbying exercise whereby over 50 of industries and types of businesses have been exempted from the ABC test in Dynamex ABC and, for those companies fortunate enough to have been carved out of the harsh ABC test, statutorily re-establishing the multi-factor test in Borello for wage and non-wage claims.

Those carved out of AB5 are the following:

  • selected professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants)
  • broker dealers, investment advisers, direct salespersons, private investigators, and commercial fishermen
  • selected professional service providers that meet all of six specific requirements in the following occupations: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists
  • licensed real estate salespersons, repossession agents, estheticians, electrologists, manicurists, barbers, and cosmetologists
  • business-to-business contractors that meet all of 12 specific requirements
  • selected construction subcontractors and motor club service providers
  • referral agencies connecting clients with service providers that meet all of 10 specific requirements in the following industries: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup

Some of the exemptions do not, however, cover all businesses in a particular industry, especially where the carve-outs include a number of specific requirements, all of which must be met.

Many industries were not granted exemptions even though they are similar to the types of industries that AB5 specifically carved out from having to meet the strict ABC test.  And certain types of gig economy businesses, such as ride-sharing technology companies, were likewise omitted from any relief from Dynamex and are now covered by the ABC test for both wage and non-wage claims.

Operating in California with ICs After AB5

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test must still comply with the multi-factor Borello test.  Many businesses in industries that obtained a carve out will still be governed by the ABC test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.  Thus, those businesses that will be covered by Borello need to structure, document, and implement their IC relationships in California consistent with that multi-factor test, which is similar in many ways to most of the varying tests for IC status under the major federal laws and a majority of state laws.

For some companies that will be governed by the Dynamex ABC test in California, establishing all three prongs of the ABC test may be untenable.  But the ABC test may well be interpreted by the courts in California in a manner that legally permits a number of companies to continue to use ICs.  In that regard, few courts have yet to issue decisions applying Dynamex and the Supreme Court of California has yet to apply any of the three prongs in any case.  Therefore, while it will undoubtedly be more challenging to structure, document, and implement an IC relationship in a business governed by the ABC test in California instead of the multi-factor Borello test, it can be done with certain types of businesses.  Indeed, California is not the only state with an ABC test – no less than 20 have variations of that test for IC status.

Many companies that have sought to enhance their compliance with both a multi-factor test and a state law ABC test have resorted to an enhancement process such as IC Diagnostics™, which elevates a company’s level of with compliance applicable state and federal laws governing ICs by restructuring, re-documenting, and re-implementing IC relationships.  This can be done in a customized and sustainable manner without changing a company’s business model.

A process such as IC Diagnostics™ can also be used in an effort to meet the six specific requirements under AB5 for selected professional service providers, the 12 specific requirements under AB5 for business-to-business contractors, and the 10 specific requirements under AB5 for referral agencies.

Companies that are operating in California and elsewhere with ICs should also be enhancing and updating their arbitration clauses with class action waivers so they can most effectively seek to limit class and collective action lawsuits, as we discussed in detail in a blog post and article last fall.

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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