As expected, AB 5 has been signed by the governor and enacted into law. AB 5 codifies the California Supreme Court’s decision in Dynamex v. Superior Court and implements the so-called “ABC” test that will now be used to determine whether a worker should be classified as an independent contractor or employee. AB 5 shifts the burden of proof onto the hiring company by presuming that workers are employees and not independent contractors unless the hiring company can show that:

A) The hiring company does not control or direct how the person performs the work.

B) The person performs work that is outside the usual course of the hiring company’s business.

C) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The law will affect thousands of workers and will bring about a realignment of the employer/employee/independent contractor relationship here in California. Proponents of AB 5 assert that the law will bring needed relief to many workers who have allegedly been misclassified by their employers. But the law may also create new and unintended consequences, not only for “gig economy” business models, but for other California companies that contract with independent contractors.

EXPANSION & EXCEPTIONS

AB 5 expands the reach of Dynamex beyond the Industrial Wage Orders and covers the California Labor Code. The bill also includes a series of amendments that make exceptions for various categories of people, from hairstylists to physicians. Unfortunately, some “gig economy” industries drew the short stick and only some exemptions apply to the crafts and workers supporting industries that traditionally operate on a short-term project basis or to workers who prefer the flexibility of working as independent contractors.

Nonetheless, one significant addition to the bill is the “business-to-business” exception that requires the employee or independent contractor status of a business services provider to be governed by the prior standard so long as a series of 12 conditions are met. Businesses should consult their employment counsel to determine if any of these exceptions apply to their workforces.

PATH FORWARD

What effect will this new legislation have? It is still too early to tell. There will likely be legal challenges over retroactive application of the statute and potential litigation over the ambiguity of the language describing the various exceptions in the bill and the extent to which other alternative employment tests may nonetheless be applied after the bill’s enactment.

Smaller companies or even individuals that work with independent contractors will now have to examine whether they fall under the ABC test. The consequences for misclassifying a worker are significant, with “willful misclassification” penalties of as much as $25,000 per violation. With the consequences of misclassification as harsh as they are, most businesses will likely try to avoid risk and err on the side of reclassifying independent contractors as employees in close cases, or make sure their independent contractors clearly pass the ABC test. Companies are already consulting with employment lawyers to review their contracts and arrangements.

As a practical matter, this may mean that businesses that are not subject to a collective bargaining agreement or other wage rate-setting agreement will lower their wage rates or increase their prices or eliminate positions altogether to account for the increased costs. Other companies may decide to restructure their workforces, and some may even move their operations to states that do not use the ABC test.

There are already efforts underway to place a measure on the ballot in California and to introduce new legislation in next year’s session to further amend AB 5. Uber, for example, has stated that it will not reclassify its drivers and may litigate. The final chapter to this story has not yet been written.

If companies have any question about how AB 5 affects their relationships with independent contractors, they should consult with legal counsel who can analyze the facts specific to their situation to determine if their arrangements pass muster with the new law or how they can be modified to do so. Taking preventive and diagnostic steps before the law’s effective date of January 1, 2020 is the best path forward.

Jesse Jauregui is a partner in the Labor & Employment Group at Alston & Bird.
For more information on Jesse Jauregui, visit alston.com.

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