California Governor has signed into law a landmark bill that will make it more difficult for employers to classify their workers as independent contractors instead of employees. This can have big impact upon gig economy workers, such as drivers for ridesharing companies, who can now hope for a guaranteed minimum wage, vacation and sick pay. California’s bill is possibly the strictest of its kind in the nation. It allows the state and cities to file lawsuits against companies over misclassification, overriding the arbitration agreements that some businesses use to protect themselves from worker complaints.
The bill, AB-5, comes into force on January 1, 2020. It codifies the California Supreme Court decision in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex). It creates a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits. A 3-part test, commonly known as the “ABC” test, is applied to establish whether a worker is an independent contractor. A worker is an independent contractor only if the hirer proves all of the following:
A. the worker is free from the control and direction of the hiring company “in connection with the performance of the work, both under the contract for the performance of the work and in fact”;
B. “the worker performs work that is outside the usual course of the hiring company’s business”; and
C. the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature” as the work performed for the hiring entity.
A hirer’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.”
AB 5 contains carve-outs for several industries and professions including professional services, doctors, lawyers, real estate, insurance, referral agencies, and others. Several industries including the gig economy and trucking did not receive express carve-outs. Other exemptions come with conditions. Commercial fishermen are exempt except from unemployment insurance. Barbers, cosmetologists and manicurists are exempt only if they set their own rates, are paid directly by clients and schedule their own appointments. Salespeople are exempt, provided their pay is based on actual sales rather than wholesale purchases or referrals.