AB5 Passes State Assembly Redefining “Employee” and “Independent Contractor”

Assembly Bill 5, authored by Assemblywoman Lorena Gonzalez (D-San Diego), was just approved by the full State Assembly. See LA Times report here. Naturally, Gonzalez was very pleased with passage of her bill stating that, as quoted by the LA Times, “… we will not in good conscience allow free-riding businesses to continue to pass their own business costs on to taxpayers and workers. It’s our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs.”

AB 5 codifies, with many important exceptions, the California Supreme Court’s Dynamex decision from April 2018. See text of AB 5 here. The Dynamex decision imposed on California businesses a new test for when workers can be classified as independent contractors. The new test is called the ABC test. To properly classify a worker as an “independent contractor,” all three parts of the test must be satisfied. AB 5 makes the ABC test part of California’s statutory law which effectively prevents Dynamex from being overturned. Further, AB5 expands Dynamex to every employment circumstance including application of California Wage Orders and how workers compensation is determined. Several states have codified the ABC test but many limit its application to specific legal areas (such as workers compensation). Companies like Grubhub and Uber have been the hardest hit by the change in California law since their business models — and profitability — depend heavily on classifying the vast majority of their workers as independent contractors. Profitability is enhanced because independent contractors are not entitled to various labor law protections such as overtime, paid leave, workers compensation benefits, unemployment insurance benefits, and more.

The ABC test provides that a worker is an “employee” for purposes of California labor laws unless an employer can show all three of the following:

  • The worker is free from direction and control in the performance of the work; and
  • The work being performed is outside the usual course of the employer’s business (not part of the “core business”) and
  • The worker is engaged in what is generally considered an independently established trade, occupation, profession, or business

As we have noted on several occasions, this is a difficult test to meet. Companies like Uber and Grubhub will likely not be able to meet this test since they seemingly struggle to meet parts B and C. First, their drivers are performing work that is at the core of the business services that are being provided. Second, their drivers are not required to have licensure beyond having a valid driver’s license. Even if Uber and Gubhub shifted to requiring that their drivers obtain Chauffers’ licenses, that still would not satisfy the ABC test because, again, their drivers are performing the core service that the companies provide.

Note that the ABC test as written in AB 5 is a stricter version of the ABC test used in other states. For example, under the New Jersey version of the ABC test, part B can be satisfied if the work is done wholly in a location that is not the main location of the employer. This allows part B to be satisfied if the work is being performed by a worker at his or her home or at an office/location of the worker’s choice. There is no such provision in AB 5. Other states that have some variant of the ABC test include Illinois and Connecticut.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard’s law practice is focused on corporate, securities, contract, and intellectual property law for small and medium businesses in the San Diego metro area. Like us on Facebook.

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