Legal Update: Independent Contractor or Employee? AB 5 and The ABC’s of Classifying Workers in California

October 2019

The California Supreme Court’s 2018 decision in Dynamex Operations West v. Superior Court represented a major milestone in clarifying how the state Labor Commissioner and the courts will evaluate independent contractor arrangements. Since that time, the courts have been busy answering some unanswered questions about the case’s application and the state legislature has enacted legislation codifying the Dynamex decision. This article summarizes the key takeaways from Dynamex, and important developments since the case was decided.

Dynamex upended judicial precedent for worker classification and imposed a new and stringent “ABC” test on employers seeking to sidestep the rigorous pay, working conditions and overtime rules that protect employees in California. After Dynamex, a hiring entity may only classify a worker as an independent contractor if that entity can establish: “(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) that the worker performs work that is outside the usual course of the hiring entity’s business, and (C) that the worker is customarily engaged in an independently established trade, occupation, or business.”

Dynamex sent immediate shock waves into the business community. Would it be applied retroactively, opening up employers to expensive overtime, meal and break time claims? Would industries that are heavily regulated under federal law, such as the trucking industry, be forced to comply with its holding? How would gig economy jobs be affected?

Two decisions have come down since Dynamex, consistently holding that Dynamex applies retroactively. In Johnson v. Imperial Showgirls, an Orange County judge found that exotic dancers at an adult entertainment establishment could proceed with a 2015 wage and overtime pay case brought under the Private Attorneys General Act. On May 2, 2019, the Ninth Circuit Court of Appeals retroactively applied Dynamex to janitorial employees who worked as franchisees of a large janitorial company. The retroactive application of Dynamex expands monetary exposure for businesses that have not yet transitioned their independent contractors to employee status where such reclassifications are required under Dynamex.

The transportation industry, while initially optimistic that it could avoid the constraints of Dynamex in arguing for the application of federal preemption principles, has so far met resistance from the courts. The Western States Trucking Association and California Trucking Association have been unsuccessful in two lower court cases, with the Supreme Court declining review of the CTA case. The WSTA case is now on appeal to the Ninth Circuit Court of Appeals.

Meanwhile, AB 5, which codified and expanded the reach of the Dynamex decision, was signed into law on September 11, 2019. The new law will take effect in January of 2020. AB-5 seemingly requires ride-hailing, delivery and other service companies to reclassify workers or change their business model. But Uber and Lyft have publicly stated that they have no plans to reclassify workers based on the new law and believe they can meet the requirements of the ABC test. AB 5 expressly exempts the application of Dynamex to licensed insurance agents, certain licensed health care professionals, licensed lawyers, architects, engineers, private investigators and accountants, registered securities broker-dealers or investment advisers, direct salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services or pursuant to a subcontract in the construction industry. The classification of these workers will be made under the so-called “Borello” test which was applied before Dynamex.

With the passage of AB 5, California employers face an uphill battle defending independent contractor agreements that are not otherwise exempt under its provisions. Independent contractor agreements with workers who are not within the stated exemptions, and even the express desire of a worker to remain in the status of independent contractor cannot overcome the reach of the new law. Misclassification can be very costly.

Our advice: Do a classification analysis on every independent contractor who is performing services for you, and do it soon.

Want to know more? Contact Wendy Tice-Wallner at 415-733-3976 or email her at wtice-wallner@nullsideman.com.