California's Governor has signed into law a bill passed by the legislature amending Section 3351 of, and adding Section 2750.3 to the Labor Code and amending Section 606.5 and 621 of the Unemployment Insurance Code relating to employment (also known as AB 5). This bill, which will take effect January 1, 2020, is critically important to California employers and service providers – determining whether a worker is classified as an employee or independent contractor. While the law will have a significant impact on the gig economy businesses, it will undoubtedly impact many other businesses and industries. It will require all types of employers and service providers to carefully evaluate the facts and circumstances under which they rely on independent contractor classifications to operate their businesses and provide services to their customers.
What the new law does is codify the California Supreme Court's decision in Dynamex Operations West v. Superior Court, which held that an individual is presumed to be an employee unless the employer can satisfy the "ABC Test". Specifically, the ABC Test requires employer to show that the worker (A) is free from the employer's control, (B) performs work outside the employer's usual business (known as the killer "B" prong) and (C) is customarily engaged in the trade she is hired to do independent of the employer's business. What is particularly noteworthy and of critcal importance in the new law as applied to the California design and construction industry are the exceptions from this Dynamex ABC Test.
The new law excepts from the Dynamex's ABC test, workers involved in (1) professional services, (2) specific occupations, (3) business-to-business contracts for services, (4) the construction industry and (5) referral agencies. As it relates to the design and construction industry, the following occupations are excepted: 1) architects; 2) engineers; 3) lawyers, accountants and insurance professionals; and 4) certain relationships between the contractor and the individual performing construction work pursuant to a subcontract if seven criteria are met. Note, the exceptions described above do not automatically settle the question of independent contractor status. Just because a particular worker appears to fit the criteria of one of the exceptions does not automatically mean that the worker is an independent contractor – the circumstance of his or her work must still satisfy the criteria to establish independent contractor status, albeit different criteria, than the Dynamex ABC Test.
What is this alternate criteria as it applies to subcontractors or individuals performing construction work pursuant to a construction contract? The criteria was established by the California Supreme Court in the S. G. Borello and Sons, Inc. v. Department of Industrial Relations which preceded the Dynamex decision. The criteria are defined by Labor Code 2750.3 (f)(1)–(7) as: (1) The subcontract is in writing; (2) The subcontractor is licensed by the Contractor’s State License Board and the work is within the scope of that license; (3) If the work is performed in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration; (4) The subcontractor maintains a business location that is separate from the business or work location of the contractor; (5) The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services; (6) The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided; and, (7) The subcontractor is customarily engaged in an independently established business the same nature as that involved in the work performed.
What will happen as a result of this new law? One can look at other states that have utilized the ABC Test and the lessons learned. In those states, lawsuits have not gone away and litigation still abounds as to worker classification. Adoption of the ABC Test in California will certainly not signal the end of the debate in the design and construction industry as concerns who is an independent contractor, particularly with respect to subcontractors and the Statutory incorporation of the Borello factors noted above. The legislation is likely to be challenged in court; and, there is even talk of a future California ballot measure to roll back this law or repeal it.