On September 18, 2019, Governor Newsom signed AB 5 into law, as expected. The bill was enacted in response to the 2018 decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). The case created a presumption that a worker who performs services for a hirer is an employee for purposes of the Wage Orders of the California Industrial Welfare Commission (“IWC”). The case established a three-part test, commonly known as the “ABC” test, to overcome the presumption and establish that a worker is an independent contractor under the Wage Orders. Unless an employer satisfies all three elements of the test, the worker may be found to be an employee rather than an independent contractor.

1. The ABC Test

AB 5 codifies many aspects of the decision in Dynamex, clarifies its application, and expands principles to other areas. It provides that for purposes of the Labor Code, the Unemployment Insurance Code, and the Wage Orders, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates:


(A) that the person is 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.


For many organizations part B of the test may be the most difficult to meet. Because the new standard applies to the Labor Code as well as the Wage Orders, it is expected to extend the minimum wage, overtime, paid sick leave, meal period, rest period and numerous other provisions to the Labor Code to persons previously thought to fall outside the purview of these rules.


2. Statutory Exceptions To The Test

AB 5 also establishes statutory exceptions for some types of workers for whom the three-part test will be inapplicable. In many of these cases, the determination of employee or independent contractor status will be governed by the test adopted by the California Supreme Court in its 1989 decision of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). Occupations specified as exempt from the application of Dynamex would be governed by Borello.

Exempt occupations include, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fisherman, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry. The bill requires the Employment Development Department (“EDD”) to issue an annual report to the Legislature on the use of unemployment insurance in the commercial fishing industry.

3. No Reclassification Allowed

The bill states that it does not permit any employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to the bill’s enactment. It also indicates that it is declaratory of existing law with regard to violations of the Labor Code relating to the Wage Orders, and that certain provisions of the Labor Code will apply retroactively to existing claims and actions.

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