Presumed Employees Until Proven Independent Contractors

Prudent employers care about how to properly classify their workers. The enactment of Assembly Bill 5 (AB-5) by the California legislature augments the force and effect of the “ABC” test adopted in Dynamex Operations West v. Superior Court, which placed a heavier burden on employers to demonstrate that a worker is an independent contractor. ABA Section of Litigation leaders say the new law has many implications for employers, but its future is also questionable.

The Road to AB-5

Before Dynamex and AB-5, the test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations determined how a California worker was classified. Employing various factors, this test focused on whether the hirer could “control the manner and means of accomplishing the result desired.”

In April 2018, the California Supreme Court decided Dynamex. In that case, the court adopted the “ABC” test in determining whether a worker was an employee or independent contractor under the California wage orders (covering employers’ obligations respecting pay and working conditions for employees). The ABC test provides that a worker is an employee unless the hirer can prove: (A) the absence of the hirer’s control and direction regarding the worker’s service; (B) the performed work is outside the usual course of the hirer’s business; and (C) the worker is customarily engaged in an independent trade that provides similar services to others.

In September 2019, the California legislature enacted AB-5, which codifies and even expands Dynamex’s ABC test. However, under AB-5, the multi-factor Borello test would still apply to numerous potential employment scenarios.

Implications of AB-5 for Employers

Section of Litigation leaders agree that employers prefer to classify workers as independent contractors instead of employees. The biggest reason is cost savings. “Employers do not have to pay independent contractors minimum wages or provide benefits such as workers’ compensation insurance, health care, or family leave,” says Loren Kieve, San Francisco, CA, cochair of the Section’s Judicial Intern Opportunity Program. Specifically, “it is widely estimated that hiring individuals as employees adds between 20 to 30 percent to labor costs on account of social security and Medicare taxes, unemployment and disability insurance, sick leave, minimum wage and overtime requirements, workers’ compensation, and increased litigation liability,” details David E. Gevertz, Atlanta, GA, cochair of the Section’s Employment & Labor Relations Law Committee.

However, the cost saving benefit is not unique to just employers, as “independent contractors recognize some of these savings as well in the form of higher pay and/or lower taxes,” Gevertz says. Both employers and workers “may also value the reduced paperwork, hours/assignment flexibility, and general informality of these arrangements,” he adds.

The codification of Dynamex may bring more clarity for employers. “The concept is that people who do the work or provide the service that is at the core of a business should be treated as employees,” explains Kieve. However, “AB-5 introduces a few complications,” including special applications in the franchise business context and joint employer liability, Gevertz remarks.

Notwithstanding AB-5, “where possible, companies will undoubtedly look to see if they can maintain their existing independent contractor relationships as bona fide business-to-business contracting relationships,” Gevertz observes. For example, employers can consider re-characterizing the nature of the workers’ services to meet the requirements of the “ABC” test, suggests Gevertz. Uber can claim that it is not a transportation company but rather a technology company that uses an application platform to connect drivers to passengers, Gevertz illustrates. If maintaining the independent contractor relationship is difficult, “employers will likely reassess which of its workers it should make part-time employees and/or subject to intermittent schedules to reduce the labor cost impact of this new law,” notes Gevertz.

An Uncertain Future

The future of AB-5 is uncertain. “Many observers expect additional industries, including and especially those involved in entertainment and transportation, to continue to lobby to be exempted from the new law,” Gevertz says. The gig economy companies, like Uber and Lyft, will continue to fight “tooth and nail against AB-5 and Dynamex,” predicts Kieve. In fact, aided by these companies, shortly after AB-5 was enacted, a group of gig workers introduced a statewide ballot measure for the upcoming election to ensure they can continue working as independent contractors with flexible hours.

“California and its courts have been at the vanguard of protecting workers’ rights,” and “similar progressive states will follow AB-5,” but not so much with the “anti-labor right to work states,” Kieve suspects. Nonetheless, “until the dust settles, if not later, not many states will rush to emulate the ABC test,” Gevertz opines. Moreover, AB-5 may have intrastate impacts because California has begun to assert jurisdiction over home-based employees and independent contractors of out-of-state businesses, “and that trend is expected to continue,” says Gevertz.

Further developments are likely. For example, on November 20, 2019, the California Supreme Court agreed to decide whether Dynamex applies retroactively, a question certified from the U.S. Court of Appeals for the Ninth Circuit in Vazquez v. Jan-Pro Franchising International, Inc. “There are good reasons to believe that the California Supreme Court will ultimately find in favor of retroactive application, especially given the language in Dynamex suggesting that the decision merely clarified existing law as opposed to departing from it,” Gevertz says. However, what role AB-5 plays in this decision “remains unseen,” he opines.