Are Independent Contractors becoming extinct in California?

In July 2019 we commented on the significant impact the Dynamex Operations West Inc. v. The Superior Court of Los Angeles (decided on April 30, 2018) was going to have on the workers and businesses in California. As you may recall, for decades courts had defined whether a worker was deemed to be an “independent contractor” or an “employee” by applying an 8 factor test first adopted in 1989 in S.G. Borello & Sons v. Department of Industrial Relations. Under the Borello 8 factor test it was relatively easy to designate workers as independent contractors and the presumption was that a worker designated as an independent contractor would be treated as an independent contract unless the worker could prove otherwise, which was rarely the case. Then along comes the Dynamex decision which replaced the decades old 8 factor test with a much stricter “ABC” test consisting of the following 3 factors:

• Is the worker free from control and direction in connection with performing the work assigned both under the contract for performance and in actual fact;
• Is the work being performed outside the usual course of the hiring entity’s business, and
• Is the worker customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The difference between being an “independent contractor”(IC) and an “employee” is substantial. While an IC is given much more control over when and how he/she performs the work, an IC does not receive the same benefits of an employee like unemployment benefits, workers comp protections, health insurance, retirement plans and of course all the protections from wrongful termination.

Needless to say this new ABC test was alarming to many new start-up companies and gig economy companies such as Lyft and Uber which were designed around the use of IC’s.

However, the California legislature, determined to make the Dynamex decision the law of the land, passed Assembly Bill 5 (AB5) which codified the ABC test in California and was signed into law in September 2019. In addition to adopting the ABC test for determining independent contractor status, §2 of AB5 amends the California Labor Code, the California Unemployment Insurance Code and the Industrial Welfare Commission to state:

“(a)(1) …..a person providing labor or services for remuneration shall

be considered an employee rather than an independent contractor

unless the hiring entity demonstrates [all of the ABC test factors

have been met].”

As a result, the presumption now is that a worker in California is deemed to be an employee unless the company can prove the worker meets all of the ABC factors and regardless of what an independent contractor agreement signed by the worker might say.

What makes matters even more perilous is that a subsequent California appellate court case determined that AB5 could be applied retroactively meaning IC workers who have been misclassified can claim lost employee benefits for past years.

It is interesting to note that §2 of AB5 is approx. 6 pages long with the actual ABC test prescribed in a half a page while the remaining 5 ½ pages list all the professions and occupations which are exempt from AB5. And there are many additional occupations that are clamoring to be exempt as well, most notably companies like Uber, Lyft and other gig economy based businesses. In the meantime, many companies like Uber and Lyft, are refusing to change their workers’ IC designation claiming that such workers are legitimate IC’s even under AB5’s ABC test.

However, the drafters of AB5 have made clear that it is precisely companies like Uber and Lyft that were targets of AB5’s employee mandates. Indeed, the California Attorney General has filed lawsuits against both companies claiming they are in violation of AB5 by continuing to treat their drivers as IC’s.

Not surprising, Uber, Lyft and other gig economy based businesses have claimed that instantly converting thousands of current IC workers into employees would be ruinous to their business model. Since it is clear these companies will not get legislative relief from the effects of AB5, several businesses, like independent truck drivers, have filed lawsuits demanding exemption from AB5. Even more dramatic, Lyft, Uber and Door Dash are seeking to qualify a proposition on the upcoming November Ballot seeking California voter approval for a permanent exclusion from the mandates of AB5.

As a business law firm, while we certainly appreciate the many benefits of being an employee, we also recognize the needs of many start-up and small companies as well as many established companies to be able to use IC’s for legitimate business purposes. Likewise, we recognize that, particularly in today’s diverse working environment, many workers prefer the flexibility and diversity of IC work. Our Firm believes there needs to be a balance between workers and businesses in which individuals are given the broadest range of working opportunities while businesses are allowed the operational flexibility to flourish in California.

Article by Roger D. Linn © Barnett & Linn