California is Rewriting the Rules on Who is an Employee/Independent Contractor

A groundbreaking California employment bill will overhaul the way workers are designated for the purposes of workers’ compensation, liability, benefits, responsibilities and more. AB5, born of the rise of the so-called “gig economy,” has passed both the state Assembly and the Senate, and Gov. Gavin Newsom is expected to sign it. This will change the way California designates who is an employee, who is an independent contractor and the rights and responsibilities associated with each. employee misclassification

The law goes into effect on December 31st – but it’s as if all independent contractors/gig workers magically transform into employees all of the sudden. As our Orange County employment attorneys can explain, what this law does is codify last year’s California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County.

Essentially, that ruling made it harder for employers to label workers as independent contractors instead of employees. Misclassification of an employee is one of the primary reasons for employment litigation in California.

How AB5 and Dynamex Makes the Contractor v. Employee Call

Both the court case and the new law differentiate employees from independent contractors using a three-part “ABC” test.

Employment status will now be determined via examination of whether:

  • (A) The worker performs tasks under a company’s control;
  • (B) The work being done is essential to the company’s business and
  • (C) The worker doesn’t have independent enterprises in that trade.

Dynamex was a class action lawsuit that involved the classification of delivery drivers for purposes of the state’s Industrial Welfare Commission Wage Orders. These orders require employers to extend certain benefits to employees, such as:

  • Minimum wages
  • Maximum hours
  • Rest breaks
  • Overtime pay
  • Sick/paid family leave
  • Workers’ compensation

These benefits can add up to 30 percent to the labor costs, and many companies have discovered they can work around these wage orders by simply calling the worker “independent contractor,” even though there wasn’t much difference in the worker-company relationship compared to an employee.

Dynamex is a same-day deliver and courier service and drivers accused the company of misclassifying them as independent contractors when they should have been employees. It began doing this under a contractual agreement that required drivers to provide their own vehicles, pay for all transportation expenses (tolls, fuels, vehicle maintenance, liability insurance, taxes and workers’ compensation) and pay for their own cell phone.

The company landed the customers, set the rates that would be charged, negotiated driver pay on an individual basis (some got a flat rate, some got a cut of the delivery fee). Drivers were allowed to be flexible with their schedule, but they had to let the company know which days they wanted to work for them and were required to wear logo’d company apparel. Some even had to put company stickers on their cars. All this was paid for out of the drivers’ own pockets.

The state supreme court ruled that the previous test for independent contractor v. employee needed to be further clarified for those working in these types of jobs.

Why This Isn’t Over

Companies like Uber and Lyft still maintain that even with this more stringent test, their workers remain independent contractors. They’re expected to make that argument in court, which our Orange County employment attorneys know is where this is likely to end up. Drivers and other workers will almost certainly challenge the law.

It should be noted also that there are exemptions by profession, mostly where the worker sets their own rates and/or makes twice the minimum wage. They include doctors, insurance agents, lawyers, engineers, direct sellers, real estate agents, hairstylists, commercial fisherman, marketing professionals and journalists, graphic designers and HR administrators. This list isn’t exhaustive.

But while big companies like Uber and Lyft can be expected to put up a fight, smaller businesses may not. They may decide simply to reclassify and spare themselves the court costs.

Contact the employment attorneys at Nassiri Law Group, practicing in Orange County, Riverside and Los Angeles. Call 714-937-2020.

Additional Resources:

California Is Changing The Rules For Contract Workers And The Gig Economy, Sept. 16, 2019, WBUR