Assembly Bill 5, also known as the “Gig Economy Bill,” was just signed into law by Governor Newsom. How will it impact employers that employ independent contractors in California?
Most importantly, it will require a comprehensive review of such relationships. For those businesses that utilize independent contractors on any regular basis to perform tasks which are an integral part of their operations, the law may compel them to transition the workers to employees. For those businesses that only occasionally use independent contractors, they will be required to assess whether the risk of civil and/or criminal penalties warrants such hiring or whether it would be less risky to assign the work at issue to the regular workforce.
New Test for Determining Employment Status
Of course, AB-5 does not outlaw the employment of independent contractors altogether. Instead, it imposes a new test for the determination of employment status. Specifically, it adopted a three-part test articulated by the Supreme Court in a case decided last year, Dynamex Operations West v. Superior Court of Los Angeles. Under the prior test, businesses could classify workers as independent contractors if such workers had their own businesses and controlled how the work was performed. The new test minimizes the importance of such factors. Under the new test, the main variable is whether the work at issue is “outside the usual course of the hiring entity’s business.” If so, the worker may be an independent contractor so long as he or she is engaged in work or an occupation that is customarily performed by independent contractors and so long as he or she is free from the control of the business when performing the work.
At this point, the term “outside the usual course” of an entity’s business is difficult to define. Obviously, cashiers would seem to fall within the business of a grocery store. But would the same be true for the store’s janitors or its security crew? Notably, the drive share company, Uber, has stated its drivers do not fall within its usual course of business because that business is ridesharing applications–not driving.
Exceptions to the Bill
AB-5 carves out numerous exceptions. So, for now, the following workers can safely be deemed independent contractors as long as they qualified as independent contractors prior to the Dynamex ruling. This includes:
- Private investigators
- Securities brokers and advisers
- Commercial fishermen
- Certain marketing personnel
- Certain human resources personnel
- Travel agents
- Graphic designers
- Grant writers
- Certain photographers
- Certain freelance writers
- Certain cosmetologists, manicurists, barbers and estheticians
- Licensed real estate agents
Under the new law, employers who contract with other businesses for services or goods need not classify the principals of such businesses as their own employees. However, that carve out is limited to situations where the contracting business performs services for the employer–not for the employer’s customers and where the contracting business is independent, performs its work subject to a written agreement, negotiates its own rates, has a separate location and works for others.
The construction industry is exempted from the new test with respect to the relationship between a contractor and an individual working for a subcontractor. This is true only if the subcontractor is licensed (except for certain truckers), has a separate location and meets other criteria.
As many industries (such as trucking) have traditionally operated with independent contractors, and the transition to an all-employee workforce may not be economically feasible, the true impact of the law cannot yet be assessed. Certainly, there may be future legislative attempts to add further exceptions to the bill. For now though, employers will want to begin an immediate audit of hiring practices.
Workplace Arbitration Agreements in Jeopardy
In terms of other news on the legislative front, the Legislature also placed on Governor Newsom’s desk Assembly Bill 51, which outlaws compulsory arbitration of certain workplace disputes. The bill as written is subject to legal challenges on the grounds it conflicts with the Federal Arbitration Act. It is unclear whether the proposed law will ever take effect. Nonetheless, employers should monitor the status of the proposed law and proceed carefully when asking employees to sign arbitration agreements. AB-51 does not prohibit all workplace arbitration agreements. Where an employer can show its employees freely choose arbitration to resolve disputes, arbitration would remain lawful under AB-51. In addition, valid arbitration agreements signed prior to January 1, 2020 would remain lawful.