The California legislature has passed AB5, which puts the California Supreme Court’s Dynamex ruling into California’s employment law. Governor Newsom signed the bill on September 18, 2019.
The text of the bill can be found at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5
Since California is a bellweather state, similar legislation could be proposed in other states.
Under the new law, most workers are presumed to be an employee unless the hiring entity satisfies a three-factor test. Unless an exception applies, all three tests must be met in order to treat an employee as an independent contractor.
- The worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract for the work and in fact;
- The worker performs work that outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
There are many exceptions to the new rules, including professionals such as medical doctors, dentist, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, private investigators and accountants. There are also exceptions for insurance salespersons, enrolled agents, securities broker-dealers, investment advisors, direct sales salespersons, commercial fishermen, marketing professionals, human resource administrators, travel agents, graphic designers, grant writers, fine artists, photojournalists, still photographers, freelance writers, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, licensed cosmologists, and real estate licensees. Generally, these individuals are required to have a business license. (This list is not complete and additional conditions may apply to be exempt.)
Although the new law is targeted at shared-economy businesses like Uber, Lyft and DoorDash, it will have far-reaching effects, including newspaper delivery persons, truck drivers and cleaning companies.
Shared economy businesses have vowed to fight the new legislation by sponsoring ballot initiatives for override by California voters.
This issue is important because employers can be subject to many expenses and government reports for employees that might not apply to independent contractors, including minimum wages, employment taxes, unemployment insurance, worker’s compensation, and employee benefits like sick pay, vacation pay, medical insurance and retirement plans, .
California businesses who use independent contractors should consult with their lawyers about the impact of this new law, whether their independent contractors are exempt, and what they should do to comply with it.