Legal Update Memo No. 13-2019 – AB 5 – Independent Contractors (CCD)

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On September 18, 2019, the Governor approved Assembly Bill (“AB”) 5, effective January 1, 2020, codifying the California Supreme Court decision Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, which created a new “ABC” test for classifying independent contractors. Please refer to our office’s Legal Update 08-2018, dated August 22, 2018, for more information about the Dynamex decision.

AB 5 provides that for purposes of the provisions of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is A) free from the control and direction of the hiring entity in connection with the performance of the work; B) the person performs work that is outside the usual course of the hiring entity’s business; and C) the person is customarily engaged in an independently established trade, occupation, or business.

AB 5, through its adoption of Labor Code section 2750.3, provides that if a court rules that the Dynamex ABC test cannot be applied, then the determination of employee or independent contractor status shall be governed by the test adopted in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, which applied an arguably less stringent six-part test.

Labor Code section 2750.3 further lists out over thirty exempted occupations which are subject to the Borello test rather than the Dynamex test, including but not limited to certain licensed health care professionals, lawyers, architects, engineers, private investigators, accountants, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

Lastly, AB 5 amended Section 621 of the Unemployment Insurance Code to redefine the definition of “employee” to include an individual providing labor or services for remuneration who has the status of an employee rather than an independent contractor, unless the hiring entity demonstrates that the individual meets all of the specified conditions, including that the individual performs work that is outside the usual course of the hiring entity’s business.

While AB 5 primarily codifies the Dynamex decision which has been in place since last year, it is an important reminder that the failure to meet the 3-part test could result in back pay and fines for failure to pay federal Social Security and payroll taxes, unemployment insurance, workers compensation benefits, and for violation of various federal and state statutes and regulations governing retirement, wages, and hours. As such, we recommend that educational agencies ensure that their current independent contractor relationships comply with the Labor Code 2750.3

Please contact our office with questions regarding this Legal Update or any other legal matter.

Legal Update written by Loren W. Soukup, Senior Associate General Counsel.

The information in this Legal Update is provided as a summary of law and is not intended as legal advice.  Application of the law may vary depending on the particular facts and circumstances at issue.  We, therefore, recommend that you consult legal counsel to advise you on how the law applies to your specific situation.

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