On September 18, 2019, Governor Gavin Newsom signed Assembly Bill (AB) 5, which codifies last year’s Supreme Court of California decision establishing a new test to determine whether a worker is an independent contractor or an employee. In addition to codifying the ABC test, AB 5 contains carve-outs for several industries and professions including professional services, doctors, lawyers, real estate, insurance, referral agencies, and others, which will be subject to the multi-factor Borello test (or similar tests if they meet the conditions of the carve-outs). Several industries including the gig economy and trucking did not receive express carve-outs.

WHAT IS THE ABC TEST?

Under the ABC test, as established in a 2018 Supreme Court of California case, a worker is an independent contractor only if the company hiring the worker establishes the following:

  1. 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”;

  2. “the worker performs work that is outside the usual course of the hiring company’s business”; and

  3. 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 company’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,” the state’s highest court stated.

Although the ABC test already applied in some contexts, AB 5 expands its scope to all of California’s wage-and-hour laws, as well as determining coverage under the state’s unemployment insurance statute.

BORELLO TEST FOR CARVED-OUT INDUSTRIES AND PROFESSIONS

For those certain industries and professions carved out of the ABC test, courts will continue to apply the multi-factor Borello test to determine whether an individual is an independent contractor. Not all of the factors have to be met in order to establish independent contractor status. The Borello test involved the principal factor of whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Nine additional factors were also considered such as:

(1) right to discharge at will, without cause;

(2) whether the one performing the services is engaged in a distinct occupation or business;

(3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

(4) the skill required in the particular occupation;

(5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(6) the length of time for which the services are to be performed;

(7) the method of payment, whether by the time or by the job;

(8) whether or not the work is part of the regular business of the principal; and

(9) whether or not the parties believe

they are creating a relationship of employer-employee.

KEY TAKEAWAYS

In his signing message, Governor Newsom stated that AB 5 “will help reduce worker misclassification . . . which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.” Governor Newsom also expressed an intent to extend bargaining and organizing rights to workers:

Assembly Bill 5 is an important step. A next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work—all while preserving flexibility and innovation...

While some media outlets are reporting that this statement is aimed at the gig economy, California’s support of organizing efforts should be expected to extend to trucking and other industries as well. As a result, businesses may be faced not only with the operational and litigation challenges presented by AB 5, but also increased union activity as organized labor seeks to leverage the new law.

NEXT STEPS

AB 5 takes effect on January 1, 2020.

The ABC test, however, already applies to several minimum labor standard requirements as a result of the state supreme court’s 2018 decision.

Alexander Chemers is a shareholder in the Los Angeles office of Ogletree Deakins. Hera Arsen is Senior Marketing Counsel at Ogletree Deakins. Vince M. Verde is Office Managing Shareholder at the Orange County office of Ogletree Deakins and also serves as head of the firm's Trial Practice Group. This article was drafted by an attorney at Ogletree Deakins, and is reprinted with permission. This information should not be relied upon as legal advice.

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