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ABC, Not Quite as Easy as 1-2-3 – Examining the California Legal Landscape Post-AB 5

November 13, 2020 Hilary Weddell

For many years, worker classification has been an ongoing battle in California. The issue of employee vs. independent contractor has spurred many lawsuits statewide, resulted in countless precedent-setting decisions, and led to numerous bills at the Capitol to clarify and address the issue. Put simply, the law has evolved to a more rigid, complicated framework that often leaves employers with more questions than answers.

Though the future of this issue is still in flux, we can offer a few insights. This article will examine important court decisions that changed the legal landscape, and the California State legislature’s attempts to clarify the law.

The Borello Test

For nearly 30 years, California courts relied on a multifactor balancing test, established by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (Borello), to determine whether a worker should be classified as an employee or independent contractor.

The Borello Test examines the total circumstances of the relationship between the business and the person performing the work. Known as the “right to control” test, the Borello Test is comprised of multiple factors to determine employee or independent contractor status. The principal factor focuses on the potential employer’s control of the manner and means of accomplishing the work.  However, this factor is not dispositive and must be considered along with other factors, such as the skill required, the manner of payment, investment by the worker, and the length of time the services are to be performed.

The Dynamex Decision – California’s ABC Test

In April 2018, the California Supreme Court issued a ground-breaking decision in Dynamex Operations West, Inc. v. Superior Court (Dynamex)– representing a major shift in California worker classification law. The panel debated the appropriate standard for determining whether a worker is properly classified as an employee or an independent contractor for the purpose of obligations imposed by an applicable California wage order. Unanimously, the panel established a new, three-factor test known as the ABC test.

Under the ABC test, a worker can only be classified as an independent contractor if they meet all three factors:

(A) The worker 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;

(B) The worker performs work that is outside the usual course of the hiring entity’s business; and

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

Both the Borello standard and the ABC test assume the worker is an employee.  The hiring entity has the burden to prove the worker is an independent contractor. However, the ABC test is designed to make it easier for both businesses and workers to determine in advance whether a worker is an independent contractor or an employee. Additionally, Dynamex’s ABC test was limited to claims arising solely under a California Wage Order; it did not extend to other employer obligations established under the Labor Code.

The ABC test in Dynamex imposes a significantly higher burden on companies than the previous Borello standard, making it more difficult to establish independent contractor status.

AB 5 – The California Legislature’s Attempt to Expand on Dynamex

Just eight months after the Dynamex decision, the California State Assembly sought to codify and expand the ABC test into state law. Assemblymember Lorena Gonzalez introduced Assembly Bill 5 (AB 5), which would make the ABC test applicable to any claim arising under the Labor Code, not just those under the wage orders.

The bill was designed to regulate companies that hire gig workers in large numbers, such as ride-sharing companies, but it also had broader implications on the business community and other professions that rely on contractors for work. The AB 5 version of the ABC test assumes that workers are employees unless the company that hires them can prove the test elements apply. The ABC test is so tough in large part because each element (A, B and C) must be proven to establish independent contractor status; if not, the worker is properly classified as an employee.

Despite intense lobbying from the business community, the legislature passed AB 5 and Governor Gavin Newsom signed it into law on September 18, 2019. What followed was a wave of related legislation to expand upon the bill, such as attempting to carve out industry exemptions, to clarify it, or to repeal it. However, due to a COVID-shortened 2020 legislative session, one bill emerged from the pack – AB 2257.

AB 2257 – The AB 5 “Clean Up” Bill   

Introduced by Assemblymember Gonzalez, AB 2257 maintains the essential framework of its predecessor, but cleans up some areas. The new bill repealed the original language of AB 5 and added new sections to the Labor Code with updated language.  The big difference is that each exception is now set out in its own code section instead of subsections. New exceptions include translators, producers, insurance inspectors, and artists, among others. Notably absent, however, were app-based gig economy companies.

On Sept. 4, 2020, Governor Newsom signed AB 2257 into law as an urgency measure, meaning it took effect immediately upon signing. As of now, AB 2257 is the law of the state.

It is likely that, going forward, this law will continue to be modified and adjusted, whether by the legislature or the courts.

Conclusion and Look-Ahead

We can reasonably expect worker classification issues to be at the forefront of the 2021 California legislative session. Dozens of bills attempting to carve out industry exceptions to AB 5 were introduced in 2020 before ultimately being scrapped due to the COVID-19 pandemic. For example, bills attempting to exempt musicians, youth sports referees, and newspaper delivery drivers, among others, did not advance to a vote. Since many companies are fighting for industry exemptions, these bills are likely to resurface when the legislature reconvenes in December.

Meanwhile, the issue still rages on in the courts, with numerous cases pending in various state and district courts and the issue of retroactive application looming.

If you are uncertain on how these laws apply to your business, please contact an employment attorney to ensure your compliance with state law.