Effective January 1, 2020, California Assembly Bill 5 (“AB 5”) modifies the state’s various Labor laws to establish new standards for determining whether a worker is properly classified as an “employee” under California law or as an independent contractor. The distinction has wide relevance; as explained by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, the case codified by AB 5:

if a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and...complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations. On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.”

AB 5 and the Gig Economy

The nature of employment in California and globally has drastically shifted since the advent of the Internet. Digital connections provide expanded opportunities for workers to provide services remotely, without needing to be physically present at the hiring party’s workplace. Moreover, a host of applications have emerged to connect hiring parties and workers in every industry from transportation (Uber, Lyft) to delivery (GrubHub) to construction (TaskRabbit, Angie’s List), offering independent contractors a means to find work opportunities from a variety of clients (“gigs”) and operate on their own terms (e.g., hours, workplace and manner).

Most businesses offering gig economy applications have taken the position that the workers they refer are independent contractors. The companies’ business models frequently depend on not having to provide the many economic benefits and regulatory protections afforded to employees under federal and state labor law. The companies also seek to avoid vicarious liability for workers’ torts and contractual violations under common and statutory law.

While many have disputed the independent contractor classification of such workers, pointing to the often significant policing by a company of the referred workers’ fitness and performance, companies have stressed that the independence afforded to the workers (e.g., with respect to hours and choice of clients) is a great deal of the value they provide and indicates both parties understand the relationship to be that of an independent contractor.

AB 5 (which presumes California workers are employees) has thus been highly contentious, with gig economy referral companies spending millions of dollars in a failed effort to defeat the bill, arguing it will curtail the freedom cherished by the workers who use their services and possibly devastate the gig economy. In addition, many of California’s plentiful creative workers (so-called “content creators”) and those in the health and beauty industry (personal trainers, yoga teachers, beauticians) rent workspace but operate independently by design, and there has been no shortage of industry leaders and publications raising the alarm.

Having lost the fight, many such as Uber are now taking the position that even under the newly applied “ABC Test” authorized by AB 5, their users will rightly be classified as independent contractors. Furthermore, in an effort to preserve the gig economy and traditional independent contractors, AB 5 provides an extensive list of occupations and workers whose employment status will continue to be assessed under the prior, multifactor analysis known as the Borello Test.

However, given the highly detailed nature of the law’s occupational exemptions and significant evidentiary showing needed to overcome the presumption of employee status, a closer examination of the law and case history giving rise to it is appropriate.

Common Law

The issue of one party’s liability to another with whom they contract to perform services dates back to the Common Law in the doctrine of respondeat superior, governing employers’ liability in tort or contract for the acts of their agents. The initial query is still relevant today, namely whether the party contracted to perform services is an employee (in which case the employer may be liable) or an independent contractor (in which case the employer likely is not).

Employment Law in California: The Wage Orders

The Industrial Welfare Commission (IWC), established in 1913, regulated wages, hours and working conditions in California largely via its eighteen "Wage Orders," each directed to a different industry. Although the IWC was defunded in 2004, its 18 wage orders remain in effect.

Multiple wage orders often apply to a given employer, in which case all of its employees are covered by each Wage Order, even those applying to industries outside of the employee’s job description. For example Wage Order 4 operates as a kind of catch-all for office workers, but might apply to a truck driver employed by the company.

Since the IWC’s obsolescence, the Wage Orders are enforced by the California Department of Industrial Relations, Division of Labor Standards Enforcement. The principal threshold in determining the applicability of a Wage Order is whether the party contracted to perform services is an employee or independent contractor.

The Prevailing Standard: The Borello Test (1989)

In 1989, the California Supreme Court replaced the long used “control of the details” test handed down in Tieberg v. Unemployment Insurance Appeals Board, 2 Cal. 3d 943 (1970) for a multi-factor analysis in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).

The Borello test continued to emphasize Tieberg’s concern for the hiring party’s “right to control” the manner and means of accomplishing the worker’s result, but noted control need not be direct, articulated or even exercised, and in any case other factors must be considered, though no single factor is dispositive:

• Whether either party could fire without cause;
• Whether the worker had a distinct occupation or business;
• Whether the work requires direction or supervision;
• The skill level necessary to complete the work;
• Which party supplies the tools of labor and workplace;
• The length of time needed to complete the work;
• Whether compensation was a time-based wage or project-based;
• Whether the hiring party conducts the same business as the worker completes;
• What the parties actually believe, though it is merely relevant evidence.

Dynamex (2018) and the Newly Applied ABC Test

In 2018, the California Supreme Court upended the labor world by issuing its unanimous decision in Dynamex Operations West, Inc. v. Superior Court (“Dynamex”) and reframing the classification of employees under California’s Wage Orders. Dynamex (since re-branded as TForce) provided same-day delivery services across the United States, and was sued by several of its drivers for failing to provide them protections in the relevant Work Order and rather treating them as independent contractors.

The Supreme Court of California considered whether to apply the Borello Test factors, or its more recent analysis of the word ‘employ’ as used in the Wage Orders, articulated in Martinez v. Combs 9 Cal. 4TH 35, 231 P.3D 259, 109 Cal. Rptr. 3D 514. The Court cited objections to the Borello test by “state courts, administrative agencies and academic commentators” criticizing its inconsistent application and unpredictability, and opted to apply Martinez’s analysis, explaining that the Wage Orders’ use of ‘employ’ is broader than that of Federal or Common law, and includes three definitions:

• “to exercise control over the wages, hours or working conditions;”
• “to suffer or permit to work;” or
• “to engage, thereby creating a common law employment relationship.”

The California Supreme Court observed that the ‘suffer or permit to work’ definition is expansive; emphasized the protective purpose of employment law; and stated Borello indicated the burden falls on putative employers to disprove that a worker is an employee.

With an eye toward predictability and protection of workers, the Dynamex court adopted the “ABC” Test used by lower jurisdictions in a Workers’ Unemployment Insurance cases. AB 5 codifies that decision, expands its application beyond Wage Orders to the Labor Code, and codifies its application to the Unemployment Insurance Code.

The ABC Test

The ABC Test as articulated by AB 5 presumes that a worker is an employee unless the hiring party can demonstrate three factors:

• The worker is free from the hiring party’s control and direction in the performance of the work, both in the contract and in fact;
• The work falls outside the hiring party’s usual course of business; and
• The worker customarily engages in an independently established trade, occupation, or business of the same nature as that of the work performed.

California Assembly Bill 5, 20019 (“AB 5”)

With the goal of greater predictability, AB 5 alters California Labor Law in two ways:

• It codifies Dynamex’s “ABC Test,” establishing a statutory presumption that California workers are employees unless (i) they are covered by a series of statutory exemptions or (ii) the hiring party can conclusively demonstrate under the “ABC Test” that the worker is properly classified as an independent contractor; and
• It expands Dynamex’s application of the ABC Test beyond the California Wage Orders to include employees as defined by the Labor Code and Unemployment Insurance Law.

Part-time Workers Can Be Employees

AB 5, Section 1(g) provides that the act in no way diminishes “the flexibility of employees to work part-time or intermittent schedules or to work for multiple employers.”

Enforcement

Injunctions to Enforce AB 5

AB 5 authorizes the Attorney General or large city attorneys (populations greater than 75,000) to bring an action for injunctive relief to present misclassification of employees by a hiring party.

Criminal Liability of Hiring Entities

The Labor Code makes it a crime for an employer to violate specified provisions of law with regard to an employee. The Unemployment Insurance Code also makes it a crime to violate specified provisions of law with regard to benefits and payments. Accordingly, AB 5 also expands the potential criminal liability of hiring entities deemed to be have hired employees rather than independent contractors.

Retroactivity

Effective January 1, 2020, AB 5 explicitly states it is codifying existing law and that its Labor Code provisions and exemptions are retroactive to the full extent permitted by the law, including existing claims and actions. However, Workers Compensation protection is not retroactive, applying only to workers deemed employees after January 1, 2020.

AB 5 does not address whether Dynamex itself is retroactive; thus the Ninth Circuit has certified to the California Supreme Court (which has heard and will decide in 2020) the question of whether the ABC Test applies to contractor relationships formed before the Dynamex ruling in April 30, 2018.

With its emphasis on worker protection, AB 5 forbids an employer from reclassifying an employee as an independent contractor in response to the law.

Recommendations

Documentation of Employment Status

AB 5 unmistakably creates a presumption that workers in California are employees, absent the requisite evidence of independent contractor status by a hiring party. Even the law’s many exemptions for many traditional independent operators (e.g., workers in the creative, health or beauty industries) include a robust set of factors that must be demonstrated in order for a worker (or hiring party) to avoid employer / employee classification.

Therefore, both hiring parties and workers wanting to avoid such a classification are encouraged to document in advance the nature of their relationship, in particular the contract should reflect that:

• The parties understand the relationship to be that of an independent contractor;
• The worker maintains independence in performing the work (evidence may include project-based compensation, the rights of workers to set their own hours, rates and take other jobs or clients, and workers’ provision of their own tools and workspace);
• The hiring party does not itself normally engage in the type of work performed;
• The worker does routinely provide the type of of work performed.

Likely Importance of Legislative Purpose in the Interpretation of AB 5

Legislative purpose was the touchstone articulated in both Borello and Dynamex; in both cases, protection of workers is the operative goal in Wage Orders, the Labor Code and the Unemployment Insurance Code. In addition, AB 5 clearly creates a presumption of employee status. Thus it seems likely that AB 5 in applying the test under AB 5, courts can be expected to look to the law’s extensive legislative history and explanation.

Which Test Applies (Dyanmex’s ABC Test or the Borello Test):

AB 5 makes the ABC Test the default analysis for determining a worker’s status in California, and is likely to apply unless the worker is covered by an extensive list of occupational exemptions, in which case AB 5 explicitly states that the traditional Borello multifactor test continues to apply. These include:

• Licensed insurance industry employees;
• Licensed physician, surgeon, dentist, podiatrist, psychologist, or veterinarians, including those operating under a professional corporation or partnership;
• Licensed lawyers, architects, engineers, private investigators, or accountants;
• Licensed securities broker-dealers or investment advisers (including their agents and representatives);
• Direct salespeople working on commission (rather than based on hours) pursuant to a written contract stating the workers are not employees for state tax purposes;
• Licensed commercial fisherman working on American vessels (not including guests or visitors) until January 1, 2023, at which point this exemption sunsets;
• Licensed professional service workers who:
  • Maintain a business location separate from the hiring entity;
  • Negotiate their own rates;
  • Set their own hours;
  • Hold themselves out as available to other hiring entities for the same work;
  • and Exercise discretion and independent judgment in their work performance.
• Marketing work that is original and created by the worker;
• Human Resource administrators conducting non-standardized work;
• Travel agents registered with the Attorney General;
• Graphic designers
• Grant writers;
• Fine artists;
• Agents licensed to practice before the IRS, such as tax preparers and retirement plan administrators;
• Agents processing payments for independent sales organizations;
• Payment processing agent through an independent sales organization;
• Still photographers or photojournalists who do not license content submissions to the hiring party more than 35 times per year; (Note: this definition specifically exempts on-set still photographers working in the motion picture industry);
• Freelance writers, editors or newspaper cartoonists who do not provide content to the hiring party more than 35 times per year.
• Licensed estheticians, electrologists, manicurists, barbers or cosmetologists who:
  • Set their own rates;
  • Process their own payments;
  • Are paid directly by clients;
  • Set their own hours of work with discretion to choose their clients;
  • Book their own appointments independently;
  • Maintain their own business license;
  • File a Form 1099 in the event that they work on the hiring party’s premises
• Licensed real estate agents;
• Licensed repossession agents;
• Business-to-business contracts for services if the worker:
  • Is free from the control and direction of the hiring party in the performance of the work, both contractually and in fact;
  • Provides services directly to the hiring party rather than its customers;
  • Has its own business license (where applicable);
  • Maintains a business location separate from the hiring party;
  • Maintains its own business providing the services in question:
    • Actually contracting with other clients for the same services;
    • Free from supervision by the hiring party; and
    • Advertising and holding itself out as a provider to other clients;
  • Provides its own tools, vehicles, and equipment to perform the services.
  • Negotiates its own rates Sets its own hours and location (consistent with the nature of the work); and
  • Is not working as a licensed contractor.

  However, the status of an individual (as opposed to a business entity) who provides services to any of the above independent contractors is assessed by the ABC Test.

• Licensed and Registered Subcontractors in the construction industry who:
  • Have a written subcontract; Maintains a business location separate from the contractor;
  • Have the authority to hire and fire other persons to provide services;
  • Assume financial responsibility for errors or omissions in labor or services via insurance, legal indemnities and warranties or performance bonds; and
  • Customarily engages in an independent business providing the work performed;
  • This does not include registered public works construction truckers who:
    • Are a registered business entity or DMV licensed single proprietor;
    • Use only their own employees in the construction trucking services;
    • Negotiate, contract with, and are compensated directly;
  • Truckers may still be employees and rent their own trucks to an employer
• Licensed Service Workers referred by a Referral Agency to provide “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, or yard cleanup,” provided the service worker:
  • Is free from the control and direction of the Agency contractually and in fact;
  • Provides client services under the worker’s name, rather than that of the Agency;
  • Uses the service worker’s own tools and supplies;
  • Customarily engages in a business performing the same work;
  • Maintains their own clientele without Referral Agency restrictions and can obtain work through a competing Referral Agency;
  • Sets their own hours and rates and can accept or reject clients and contracts;
  • Tutoring requires the work to develop their own curriculum, rather than a person who teaches a public school curriculum or contracts to teach public school;
• Service Workers referred by an Authorized Motor Club (e.g., AAA tow truck drivers).

Service Industry Workers In The Health or Beauty Industries

Under an explicit exception to AB 5’s redefinition of “employee,” certain personal service industry workers involved in the health or beauty industries (e.g., fitness trainers, masseuses, hairdressers, or perhaps more curiously, morticians) are governed by IWB Wage Order No. 2 and defined as employees if they:

• Pay rent for a chair, booth, or space, but
  • Do not use their own funds to purchase requisite supplies;
  • Do not maintain an appointment book separate and distinct from that of the establishment in which the space is located; and
  • Do not have a business license where applicable.

Thus while an unlicensed personal trainer who maintains a gym membership and offers training services to clients booked independently may qualify as an independent contractor, in most cases a personal trainer working out of a gym will be deemed an employee subject to all applicable regulations and protections such as breaks, and employment insurance. This is true even where the parties have signed an “independent contractor agreement.”

Relevant California Case Law

“Since the court rendered its decisions in Black v. Moody's Lunch Services, Borello was re-examined by the Supreme Court in the Dynamex Operations W. v. Superior Court case, and found wanting at least with respect to wage order claims:

"In sum, we conclude that unless the hiring entity establishes (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) that the worker performs work that is outside the usual course of the hiring entity's business, and (C) that the worker is customarily engaged in an independently established trade, occupation, or business, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in wage orders. The hiring entity's failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.” Lockwood Vs Massachusetts Mutual Life Insurance Company [E-FILE], 37-2019-00035241-CU-OE-CTL (12/17/2019) (citing Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903, 964, reh'g denied (June 20, 2018) ("Dynamex") (https://trellis.law/ruling/37-2019-00035241-CU-OE-CTL/lockwood-vs-massachusetts-mutual-life-insurance-company-e-file/2019121788e6c3).

“Plaintiffs cannot establish Rhee was the Hospital's employee under the Dynamex “ABC” test because this test only applies to wage order claims. The Supreme Court expressly limited the holding in Dynamex to the specific context of “whether workers should be classified as employees or as independent contractors for purposes of California wage orders.” (Dynamex, supra, 4 Cal.5th at 914.) There are no wage order claims at issue in this case. Thus, the Dynamex test cannot apply.” Fabio Youn et al vs. Cha Hollywood Presbyterian Medical Ctr, BC704597 (11/1/8/2019) (given the explicit application of AB 5 to labor laws other than wage orders, presumably this ruling would be different if the contract had been formed after AB 5’s effective date of January 1, 2020) (https://trellis.law/ruling/BC704597/fabio-youn-et-al-vs-cha-hollywood-presbyterian-medical-ctr/20191118ca3c15)

“After the Court received evidence from Calhoun, Aqua-Tech Inc. moved for non-suit arguing that the evidence failed to show that it contracted with Calhoun for his services – as an employee or independent contractor – because the corporation was not operating as a business in the 2013-2014 time period. The Court denied the motion finding that there was sufficient evidence in the record to find that Aqua-Tech Inc. was an employer of Calhoun, under the standards announced by the California Supreme Court in Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903.” Benjamin Calhoun vs. Aqua Tech Water Management Inc., BS169815 (11/15/2019) (https://trellis.law/ruling/BS169815/benjamin-calhoun-vs-aqua-tech-water-management-inc/201911159247c1).

“Employers are generally not liable for the torts of their independent contractors. (A. Teichert & Son, Inc. v. Superior Court (1986) 179 Cal.App.3d 657, 660-661.) There are a variety of factors used to determine whether there is an employee-employer relationship. (S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341, 350-351.) ‘The principal test of employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the desired result. [Citations.] A secondary factor also constituting strong evidence in support of an employment relationship is the right to discharge at will without cause.’ Agelotti v. The Walt Disney Co. (2011) 192 Cal.App.4th 1394, 1404.”) Pablo Ortiz vs. Marcos Pavon, BC689328 (11/13/2019) (https://trellis.law/ruling/BC689328/pablo-ortiz-vs-marcos-pavon-et-al/20191113d8e553).

“The Borello test or the common law test…([s]ee Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903, 934 ….)… is intended to address the employer-employee relationship for purposes of assessing vicarious responsibility on the employer for the employee’s acts.’ “The most important factor is whether the defendant had the right to control how the agent performed the work, rather than just specify the result. One clear indicator of this control is that the defendant can discharge the worker. The full nature of the relationship between the defendant and the agent are considered. Secondary factors include whether the defendant supplied the worker with equipment, tools and an office, whether the worker was paid by the hour, the defendant’s business, the nature of the agent’s work, whether the work is usually done under the direction of a supervisor, whether the work required special skills, whether the services were to be performed for the defendant for a long period of time, and whether the defendant and the agent believed they had an employer-employee relationship.” Ruehle V. Chavez, 30-2017-00912044-CU-PA-CJC (10/10/2019) (https://trellis.law/ruling/30-2017-00912044-CU-PA-CJC/ruehle-v-chavez/20191010d8d74b).

“Specifically addressing the third-party privacy issue East Village raises, as in Williams, the second Hill requirement, a reasonable expectation of privacy in the particular circumstances, is not met. Like other courts, we doubt Williams's fellow employees would expect that information ["home contact information"] to be withheld from a plaintiff seeking to prove labor law violations committed against them and to recover civil penalties on their behalf...Rather, fellow employees "might reasonably expect, and even hope, that their names and addresses would be given to" a plaintiff seeking to vindicate their rights.” Sparks Vs East Village Tavern LLC, 37-2018-00024698-CU-OE-CTL, (11/7/2019) (citing Williams v. Superior Court (2017) 3 Cal.5th 531; Crab Addison, Inc. v. Superior Court, supra, 169 Cal.App.4th at p. 967, 87 Cal.Rptr.3d 400; Lee v. Dynamex, Inc., supra, 166 Cal.App.4th at pp. 1337–1338, 83 Cal.Rptr.3d 241; Puerto v. Superior Court, supra, 158 Cal.App.4th at p. 1253, 70 Cal.Rptr.3d 701; Belaire-West, at p. 561, 57 Cal.Rptr.3d 197; Lab. Code, § 2699, subd. (i); Pioneer Electronics, at p. 372, 53 Cal.Rptr.3d 513, 150 P.3d 198.) (https://trellis.law/ruling/37-2018-00024698-CU-OE-CTL/sparks-vs-east-village-tavern-llc/20191107bd6d09).