New California Law Regarding Independent Contractors

California, with an annual GDP larger than France and home to 39.6 million residents, was actually once its own country for about a month in 1846. Even the state flag says so. And California does its own thing related to labor and employment laws. If you do business in California, you probably already know that.

Last week, Governor Gavin Newsom signed Assembly Bill 5 (“AB5”) adopting into the California Labor Code an earlier decision from the California Supreme Court about who is an employee and who is an independent contractor. Under AB5, which will become effective January 1, 2020, workers will be considered employees rather than independent contractors unless the employer demonstrates that all of the following conditions are satisfied:
 

1. 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.
2. The person performs work that is outside the usual course of the hiring entity’s business.
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This so-called “ABC” test makes it much more difficult to classify a worker as an independent contractor in California.

What does this mean? First, employees are covered under a multitude of both state and federal laws, such as minimum wage and overtime laws, mandatory meal periods, unemployment compensation, workers’ compensation, paid leave, benefits, etc.

More importantly, employers in California are likely to see litigation over misclassification in industries that have relied on independent contractors to form the core of their workforces. There are two perfect examples in the “gig” economy: Uber and Lyft. Both Uber and Lyft have classified their drivers as independent contractors allowing them to work whenever and for whoever they want. And, these drivers did not get overtime, paid leave or benefits. Now, these gig workers are going to change status to employees, which will undoubtedly have an impact of labor costs. And, maybe these new “employees” of Uber and Lyft will even organize a union to represent them.

There are quite a few exceptions to this new law. The exceptions read like a who’s who list of professionals. They include doctors, psychologists, dentists, podiatrists, insurance agents, stock brokers, lawyers, accountants, engineers, veterinarians, direct sellers, real estate agents, hairstylists and barbers, aestheticians, commercial fishermen, marketing professionals, travel agents, graphic designers, grant writers, fine artists, enrolled agents, payment processing agents, repossession agents and human resources administrators. There are also exceptions for certain photographers, photojournalists, freelance writers, editors or newspaper cartoonists and a few other business-to-business activities.
 
The California legislature also came up with a way around arbitration agreements that employers often use with workers to avoid class and collective action or jury trials. Instead, the California attorney general and cities can bring enforcement lawsuits directly against the employers.

California has typically been on the forefront of employee-oriented legislation. Other states have followed its lead in the past. New York is now looking at something similar, and it would not be surprising to see the Democratic presidential nominee supporting such a position on a national level. Bernie Sanders introduced the “Workplace Democracy Plan,” which is similar to AB5, and Elizabeth Warren, Kamala Harris, Pete Buttigieg and Julian Casto also supported AB5.
 
If your workforce relies on independent contractors in California, even if only on occasion, it would be very wise to take a hard look at AB5. Elsewhere, keep an eye on legal trends. Misclassifying one or two workers may not be a big blow to your business, but misclassifying 100 or 1000 or more could be a bet-the-farm proposition.

If you have additional questions, please contact Paul Bittner or another member of our Labor, Employment and Immigration Practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.