Navigating AB 5 and Its Amendments – Independent Contractors in California

In April 2018, the California Supreme Court’s opinion in Dynamex Operations West v. Superior Court[1], changed the law for determining whether workers are “employees” or “independent contractors” for claims under the California Wage Orders.  Prior to the Supreme Court’s Dynamex ruling, California law adhered to the decades of “totality-of-the-factors” test provided in S.G. Borello & Sons, Inc.  v. Dept. of Indus. Relations.[2]  Under the Borello test, whether a worker was deemed an employee focused on the hiring entity’s right to direct and control the manner and means of the work, and required consideration of numerous other factors, specifically, (1) whether the one performing services was engaged in a distinct occupation or business, (2) whether the work was a part of the principal’s regular business, (3) the ability to discharge at will, (4) length of time the services would be performed, (5) the kind of work and skill involved, (6) who supplied the tools and the place of work, (7) the method of payment (time or by the job), and (8) whether the parties believed they are creating an independent contractor relationship.  The failure to meet one of these factors was not fatal to independent contractor status.

The Dynamex decision put in place the “ABC test”, making it significantly more difficult to establish a worker’s independent contractor status.

Specifically, the ABC test requires the hiring entity establish all of the following three conditions for a valid independent contractor relationship:

1. The worker is free from the control and direction of the hiring entity, both under the contract and in fact; and
2. The worker performs work that is outside the hiring entity’s “usual course” of business; and
3. The worker is customarily engaged in an independently established trade, business, or occupation of the same nature as the work being performed.

If the hiring entity cannot establish any one of the factors, the individual providing the services will be deemed an employee.

AB 5 enacted Labor Code section 2750.3 and codified Dynamex’s “ABC” test for purposes of the California Labor Code, Unemployment Insurance Code, and Wage Orders.   Additionally, AB 5 set out numerous exceptions to the ABC test.  In most instances, if an exception applies, the Borello test will determine whether the service provider is an independent contractor or an employee.   Notable exceptions include persons or organizations licensed by the Department of Insurance, licensed accountants, architects, engineers, lawyers, physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians.

AB 2577 Changes to the Scope of the ABC Test

Effective September 4, 2020, AB 2257 amended some of the existing exceptions to AB 5 and carved out several new exceptions, allowing for the less restrictive Borello test to apply in the case of the following:

• Bona fide business-to-business contracts
  • The amendment clarifies this exception, and allows for more flexibility in how it is to be applied, the limitation that the service provider cannot provide services directly to the contracting business customer remains, unless employees of the service provider are preforming the services and the service provider regularly contracts with other businesses.
• Contracts for a “single-engagement”, that is, a stand-alone, non-recurring event in a single location, or a series of events in the same location, no more than once a week.
• Certain services provided to customers through “referral agencies”
  • As defined by the amendment, a referral agency is a business that provides referrals for a certain type of enumerated services, such as graphic design, tutoring, consulting, event planning, animal services, and minor home repair, among others.
• Professional services, which (in addition to those professions previously enumerated in AB 5), now includes underwriters, translators, fine artists, and grant writers, among others.
  • The bill also removes the 35 per year submission cap that previously applied under AB 5 to professional photographers, writers, journalists, and editors.
• Data aggregators, that is, businesses, or other organizations, that request and gather feedback on people, concepts, ideas, and the like.
• Certain occupations in the creative field, including those involved in creating, marketing, promoting, or distribution of musical recordings/compositions; performance artists who present original/creative work.

What about App-Based Drivers and Proposition 22?

Following AB 5, Uber, Lyft, and other app-based companies spent over $200 million on a ballot measure—Proposition 22—which allowed voters to decide whether app-based drivers could be classified as independent contractors under certain circumstances.  The most expensive ballot measure in California history was ultimately successful – 58% of voters approved Proposition 22.  As a result, app-based drivers covered by the law can now be properly classified as independent contractors even though they are engaged in performing work that falls within their hiring entity’s “usual course” of business (i.e., driving).  Regardless, Uber and Lyft remain mired in litigation for their past practices.

What Does This All Mean to the Independent Contractor Analysis?

The general rule in California is that any person performing services for another is presumed to do so in the capacity of an employee.  Labor Code section 2750.3 codifies the ABC test to require the hiring entities to establish each of its three requirements under the ABC test to show the service provider was an independent contractor.  However, AB 5 and AB 2257 carve out numerous exceptions to the application of the ABC test.   Still, meeting an exception to the ABC Test does not necessarily mean that the service provider is an independent contractor.  In most circumstances, meeting one of these exceptions means that the more nuanced and less stringent Borello test will apply instead of the ABC test.   Thus, those planning to rely utilize independent contractors, even when an exception to the ABC test seemingly applies, should evaluate the situation carefully and consider consulting counsel if uncertain about the analysis.

About Rogers Joseph O’Donnell Labor & Employment Law Practice Group

Rogers Joseph O’Donnell’s Labor and Employment Law Practice Group is comprised of experienced labor and employment attorneys with extensive experience representing and advising individuals, businesses, government contractors, and public entity employers.

The depth and breadth of our employment law experience allows us to offer the same quality of representation usually expected from much larger law firms, while our relatively small size enables us to maintain highly competitive rates and a more direct and personal relationship with our clients.

Our labor and employment practice focuses on counseling – guiding employers as to how to navigate the patchwork of employment laws and avoid litigation before it starts – while also defending against single and multiple plaintiff litigation, class and collective actions, and PAGA actions.  While we believe that early case evaluation and mediation are often advantageous ways to minimize the costs and disruption of protracted litigation, we are also skilled, trial-ready attorneys with a winning record in court, administrative hearings, and arbitration.

If you have questions about California labor and employment law, please contact the Rogers Joseph O’Donnell attorney with whom you regularly work, or the authors of this legal update:  Sharon Ongerth Rossi, Virginia K. Young or Gayle M. Athanacio.

[1] 4 Cal. 5th 903 (2018)

[2] 48 Cal. 3d 341 (1989)