California Assembly Bill 5 (AB5) re-defines what it means to be an “independent contractor.” This bill was codified as a result of the 2018 Supreme Court decision in Dynamex Operations West, Inc v Superior Court of Los Angeles. The court decided in favor of the stricter “ABC Test,” as opposed to the “Control Test,” in determining whether a worker is properly classified as an independent contractor.
The “ABC test” puts the burden of proof on the employer (upstream party) to prove that the person (downstream party) is in fact an independent contractor. The employer must prove that the person satisfies the three conditions below:
- The person 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.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If the employer cannot prove all three, then the “person” is considered an employee and gets employment related benefits normally afforded to an employee. Those include, but are not limited to, minimum wage, meal and rest breaks, overtime pay, paid sick leave, and workers compensation.
There are certain industry exceptions (some are conditional) like doctors, lawyers, securities brokers, real estate agents, construction, etc. Never-the-less this is a major bill that will affect business both large and small.
If an employer misclassifies an employee, there are severe penalties. Labor code section 226.8 states employers can be liable for civil penalties of $5,000-$15,000 for each violation. If its determined that an employer continually misclassifies employees, those penalties can jump to $10,000-$25,000 per violation.
AB5 has been in effect since January 1, 2020 for wage and hour, unemployment insurance and other benefits. Starting on July 1, 2020, AB5 will be in effect for worker’s compensation (regardless of effective/expiration date).
There have been a number of legal challenges and court cases which have halted AB5 for certain industries. This law is fluid and will continue to change. It is imperative that every employer review AB5 and follow its regulation. If you have questions on whether or not your independent contractors qualify as employees and what that means in terms of benefits, please call your local human resource professional, insurance professional, or labor law attorney.