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New Law Goes into Effect, Impacting Many California Businesses

The law simply known as “Assembly Bill 5”, or “AB-5”, but officially codified as Section 2750.3 of the California Labor Code, went into effect on January 1, 2020. While Gov. Newsom apparently signed the bill into law to target massive “gig” economy companies like Uber and Lyft, the fact is that the law will have a significant impact on many California businesses.

What AB-5 Does

AB-5 adopts as state law the ruling from the California Supreme Court Ruling in the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles, where the Court introduced a new test (known as the “ABC Test”) to determine whether a worker was an independent contractor or an employee. Under this new test, California now presumes that all workers are employees, and places the burden on the business to prove that a person is an independent contractor. In order to be considered an independent contractor, the employer must show ALL of the following regarding the worker:

  1. Worker is free from the control and direction of the business in connection with the
    performance of the work, both under contract for the performance of the work and in
  2. Worker performs other work outside of the hiring entity’s business; AND
  3. Worker is customarily engaged in an independently established trade, occupation, or
    business of the same nature as that involved in the work performed.

Because of Newsom and AB-5, the burden to prove that an independent contractor is not an employee is on the business that hired the contractor.

Is YOUR Businesses Impacted by AB-5?

The short answer is YES: All businesses that use independent contractors in the State of California are subject to the requirements of AB-5. The impact of the new law goes far beyond companies it was intended to target like Uber and Lyft: Trucking companies, online news outlets, cleaning companies, and other companies that regularly use independent contractors to either install or deliver items are significantly impacted by the law.

If your company regularly uses independent contractors, you may be subject to a lawsuit by one of those persons who can now claim to be an employee. This would entitle the person to the same benefits available to employees in the state, including overtime and breaks. In addition, if your company provides full time employees with benefits (including medical insurance), the independent contractor(s) that you use could sue to demand those benefits (assuming they are working “full time”).

The independent contractor could file a lawsuit for “willful misclassification” (independent contractor vs. employee), and your business would be liable for civil penalties, attorneys’ fees and costs, benefits not received and tax liabilities incurred.


Are the Independent Contractors Your Business Uses Specifically Exempted from AB-5?

There are several categories of independent contractors that are exempt from AB-5. While Labor Code Section 2750.3 appears to be straightforward regarding these categories, it is anything but: It references other sections of California law and as such it may be difficult for most business owners to know whether or not the independent contractors that they use are exempt. The following guide is not conclusive or comprehensive, but as this law is new, includes the most up-to-date information available:

Exempt professions and relationships include, subject to conditions, the following:

  1. Professions: insurance agents, doctors, dentists, veterinarians, lawyers, architects, engineers, private investigators, accountants, securities brokers, investment advisors, direct sales persons, commercial fishermen, newspaper distributors;
  2. Professional Services: marketing, human resources, travel agent, graphic design, grant writer, fine artist, enrolled agent, payment processing agent, still photographer, freelance writer/editor/cartoonist, esthetician, electrologist, manicurist, barber, cosmetologist;
  3. Certain Special Licensees: Real estate licensee, Repossession licensee; Construction subcontractors;
  4. Business to business (business hires another business to do work);
  5. Other Specific Professions: Referral agency providers: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup; automobile service providers.

It is important to note that even the above-referenced “exempted” independent contractors may still be legally considered “employees”: The exemption only means that the state will not presume that they are!

Lawsuits and Current Status of the Law

Several industries have already filed suit to seek exemptions from AB-5. For example, truck drivers, Uber, and Lyft have all filed suit seeking exemptions from the law. Those cases are pending, and the outcome is anything but clear.

Considering the broad applicability of the law to California businesses, it is important that you immediately review your business’ relationship with independent contractors to determine how AB-5 will impact the way you do business, and your potential liability.

Call the business attorneys at Vogt, Resnick & Sherak, LLP for a consultation on this new law and how it may affect the way you do business.