Beginning January 1, 2020, AB 5 (Gonzalez), which is Chapter 296, takes effect. This effective date is for provisions of the Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission Wage Orders.
Section One of the bill sets forth a number of statements of legislative intent that are not codified. The purpose of these “findings and declarations” is to establish the Legislature’s intent to codify the Dynamex ruling and to clarify its application to specific circumstances. First, the bill codifies the Dynamex decision that essentially provides that a person providing labor or services for payment shall be considered an employee, rather than an independent contractor, unless the hiring entity demonstrates that there is no violation of any of the three prongs of the ABC Test.
The ABC Test in Dynamex provides that a person can only be an independent contractor if all three prongs are met: (A) 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.
Thereafter, AB 5 states that, notwithstanding this ABC Test, any statutory exception from employment status or any extension of employer status or liability remains in effect and that, if a court rules that the 3-part test cannot be applied, then the determination of employee or independent contractor status shall be governed by the test adopted in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).
AB 5 then provides more than thirty exemptions from the ABC Test. First, the bill exempts specified occupations from the application of Dynamex and instead provides that these specified occupations are governed by the Borello multi-factor test for determining the proper classification of workers.
These 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 fishermen, 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 also requires the Employment Development Department, on or before March 1, 2021, and each March 1 thereafter, to issue a report to the Legislature on the use of unemployment insurance in the commercial fishing industry. The bill makes the exemption for commercial fishermen applicable only until January 1, 2023, and the exemption for licensed manicurists applicable only until January 1, 2022.
In the last set of amendments to AB 5, the law authorizes an action for injunctive relief to prevent employee misclassification to be brought by the Attorney General and specified local prosecuting agencies, basically the city attorneys for the state’s five largest cities.
AB 5 also recasts the definition of “employee” for purposes of unemployment insurance to include an individual providing labor or services for remuneration who has the status of an employee rather than an independent contractor, unless the hiring entity demonstrates that the individual meets all of the specified conditions, including that the individual performs work that is outside the usual course of the hiring entity’s business.
Of important note is the provisions of AB 5 “do not constitute a change in, but are declaratory of, existing law” with regard to violations of the Labor Code relating to Wage Orders of the Industrial Welfare Commission. The new law also states that specified Labor Code provisions of the bill apply retroactively to existing claims and actions to the maximum extent permitted by law while other provisions apply to work performed on or after January 1, 2020.
Finally, AB 5 provides that the bill’s provisions do not permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to the bill’s enactment. Employers in California will need to examine closely these new provisions of law, particularly for those who are possibly subject to an exemption.