We still don’t know whether Governor Gavin Newsom will be a brake on California’s Democratic legislature or a rubber stamp. The California Assembly’s recent passage of Assembly Bill (AB) 5 may provide an early test, once it passes the Senate—which it surely will.
AB 5 codifies the California Supreme Courts recent Dynamex decision and adds some wrinkles to it. By now, we all know that Dynamex abandoned the state’s traditional common-law test for independent contractor status, a nuanced and multifaceted analysis. Instead, Dynamex uses a three-pronged pitchfork, which has the advantage of simplicity, if not accuracy. Under that blunt test, you are an employee unless all three of the following apply:
- The work performance is free from the hiring entity’s control and direction;
- The work performed is outside the usual course of the hiring entity’s business; and
- The worker regularly and customarily engages in the trade, occupation, or business.
Californias Assembly just made the Dynamex test a state statute. While Dynamex interpreted only the state’s wage orders, AB 5 more broadly applies to the definition of “employee” throughout the California Labor Code. As a statute, it also stands against the possibility that a future court may abandon Dynamex and restore the common-law test. AB 5 also preempts a competing bill that has been limping around Sacramento, which would have disapproved of Dynamex and restored the common-law test. That bill was dead on arrival.
Everybody recognized there were holes, gaps, and unintended consequences stemming from the Dynamex test; AB 5 corrected some, but not all, of them. Most important, AB 5 carves out a series of jobs from the Dynamex doctrine.
Under AB 5, licensed doctors, real estate agents, stockbrokers and financial advisers, direct salespeople, and hair stylists all remain subject to the common-law test, with some technical limitations. Similarly, professional service providers are kept under the common-law test if they meet yet another series of technical requirements.
Follow the Bouncing Ball
New amendments will likely be added to the legislation before it reaches the governor’s desk, as some Dynamex anomalies aren’t remedied by AB 5 as it stands. Everybody has their favorite example of an unreasonable and unfair application of the case. Mine is the traditionally independent contractor freelance journalist, with tons of discretion, working for many journals but, by definition, failing the middle prong of the test. It’s hard to believe any legislation will catch all the continued glitches, but tweaks will keep coming as the lobbyists stay on AB 5 until it reaches the governor.
For us, whatever the legislation looks like, it will create a new world of compliance problems. We have been living with a common-law test of independent contractor status for decades, and—whether we like the test or not—at least we finally know what it is. Misclassifying an independent contractor carries serious ramifications, so being able to make the call accurately is quite important.
But all of our history determining independent contractor status goes out the window as new judicial and statutory tests have been created. None of the cases that have framed the issue in the past has any authoritative applicability, so we are all now somewhat at sea and making the determination of independent contractor status.
We will still begin our analysis by determining whether the individual is exercising independent discretion without extensive supervision. Importantly, if a worker does a job necessary for your operation that an outsider would assume is to be done by an employee, independent contractor status will be suspect. So the traditional role of an independent contractor filling in on a short-term basis to supplement your existing staff during the busy season may now be a thing of the past.
Finally, you’re going to have to grill potential independent contractors about who their other clients are, how long they have been conducting business, and under what business form they operate. We don’t know how the California Labor Commission—or the courts—will interpret the test’s language.
On all the points, until we get new guidance, nobody can be sure how the rules will be applied. That is troubling when predictability and consistency are what we look for in employment rules. After decades of grappling with, and perhaps finally understanding, the common-law test, that history is now out the window, at least until the courts and the legislature decide to change the rules again.
To learn more about navigating around AB 5, join us in California on Tuesday, October 1 at this year’s HR Comply California for the session Independent Contractor or Employee? The Practical Impact of Dynamex and Key Considerations if AB 71 or AB 5 Become Law given by expert Marc Jacuzzi, Esq., Simpson, Garrity, Innes, & Jacuzzi, P.C. Learn more.
|Mark I. Schickman is of counsel with Freeland Cooper & Foreman LLP in San Francisco and Editor of California Employment Law Letter. You can reach him at 415-541-0200 or email@example.com.|