Why you can’t ignore AB5—and what it means for the future of independent contractors

In April 2018, the California Supreme Court made a landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles that set a new, far more restrictive standard—the ABC test—for determining whether a worker is an employee or an independent contractor.

And in a state known for aftershocks, the Dynamex decision has certainly sent its fair share roiling through the worker classification landscape. The case itself involved the job status of delivery drivers, but because the ABC standard in the ruling makes it far more difficult to classify a worker as an independent contractor, the decision has the potential to have a massive impact on the gig economy and any industry that relies on an independent workforce.

Cue a fair bit of panic and uncertainty. Since the decision was limited to Wage Orders and since no legislation was in place to define the ABC Test’s future application, it left major question marks over the possibilities of the courts applying the standard retroactively or in other contexts, like workers’ compensations cases.

Assembly Bill 5 (AB5) seeks to codify into law the ABC Test as the new standard for independent contractor (IC) misclassification in California. This would effectively rewrite the rules of the independent economy and on May 29, 2019, it passed the State Assembly and is set to be voted on by the State Senate in September.

All signs point to the bill passing and since variants of the ABC test are already in play in other states, taking a close look now at how your workforce (both in and outside of CA) fairs) in relation to the ABC Test is a smart move.

An ABC Refresher

If you live and breathe compliance, you may already be lying awake at night reciting the prongs of the ABC Test; but if not, let’s recap. Under the ABC test a worker is presumed an employee—not an independent contractor—unless they meet all 3 of the following criteria:

• (A) The worker is free from control and direction of the hiring entity in connection with the performance of the work, both in contract and in fact.

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

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

Prior to Dynamex and the ABC Test, the standard for determining IC status in California was the Borello test, the primary factor of which is whether “the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”

Exemptions? Maybe, maybe not

If AB5 becomes law, certain industries may be exempt from the ABC Test. As currently written the only exemptions include lawyers, doctors, dentists, hairstylists, accountants, insurance agents, engineers, real estate agents, financial advisers, and some health care workers.

However, before the September vote by the State Senate, the California Chamber of Commerce and dozens of industry groups are lobbying hard to make additional industries exempt—especially the transportation industry. These efforts may mean that the bill could still be amended before the Senate hears the bill.

Before banking on additional exemptions though, it’s important to note that just because a worker may be in an industry or profession that is exempt from AB5, it does not mean that they would automatically be assumed to be independent contractors. It only means that their status in a worker misclassification claim would be evaluated based on the Borello standard.

Broad application could be the new norm

As currently written, AB5 indicates a broader application of the ABC Test in 3 ways:

• In California, the ABC Test would be applied not just to Wage Orders, but to all the provisions of the Labor Code and Unemployment Insurance Code as well. (And the legislature plans to determine whether it would be the test for the Workers’ Compensation and Insurance Code at a later date.)

• The current iteration of AB5 would make it possible for the ABC Test to be applied retroactively, meaning that businesses could face major financial penalties for misclassifying workers years before the Dynamex decision and the adoption of the ABC Test.

• Because California has the largest state economy in the US, its laws and lawmakers have significant sway in national politics. That combined with the notoriety of the Dynamex decision, makes it all the more likely that if AB5 passes, other states may follow suit and expand their adoption of the ABC Test. And if “as California goes, so goes the nation” reigns then it opens the door to nationwide affects for independent contractor–heavy industries.

Get your compliance ducks in a row

So what does it all mean? Despite the likelihood of AB5 passing, businesses with independent contractors don’t need to despair just yet. Now’s the time to take a good hard look at your current IC practices across the board and make corrections sooner rather than later.

While we can’t claim to solve California, our compliance-loving advisors here at Openforce have been refining our recommended processes with additional measures to help businesses proactively reduce the risk of a misclassification claim in other parts of the country.

Feel like you need a risk check-up? Get in touch here.