In September of 2019, Californian Governor Newsom signed Assembly Bill 5 into law. Referred to as AB 5, the new law changes how employers classify and differentiate between employees and independent contractors. Those from both sides, employers and the independent contractor community itself, have protested and lobbied against this change, which went into effect on January 1 of this year.
AB 5 is likely to reduce the number of workers that can be labeled as independent contractors, forcing companies to classify them as employees. As such, companies will be required to extend certain protections and benefits, including overtime pay, health insurance and workers’ compensation. These changes can be problematic for companies that need short term help or specialized labor. It also creates problems for those within the gig economy that use freelance work to increase their income and maintain their independence.
What’s changed and why?
On April 30, 2018, the California Supreme Court issued the Dynamex Decision, rejecting the old way of differentiating between independent contractors and employees. This came after Dynamex, a nationwide same-day courier and delivery service, was sued by a former employee who claimed they were misclassifying their workforce.
Prior to 2004, Dynamex classified drivers as employees, but switched them to independent contractors as a cost saving measure. The lawsuit proposed that this shift was a violation of the Labor Code, and the Supreme Court agreed. In addition to ruling against Dynamex, they created a new test for determining a workers’ status.
AB 5 codifies the Dynamex decision into law and adopts the ABC test for determining who is an independent contractor and who is an employee. This law went into effect on January 1 of this year, with additional provisions taking effect in subsequent years.
What is the ABC Test?
Prior to AB 5, companies used the Borello test to determine if a worker was an employee or an independent contractor. This test used 13 factors to determine if a worker could be classified as an independent contractor. These factors examined, among other things, if a worker was paid by their time or by the job, if the work was regular or integral for the employer’s business and if the work required a special skill.
Now, with AB 5, the ABC test is the new standard in determining a worker’s classification. Additionally, the Department of Industrial Relations (DIR) assumes that all workers are employees, not independent contractors, unless the hiring entity satisfies all three of the following conditions:
- (A)The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- (B)The worker performs work that is outside the usual course of the hiring entity’s business; and
- (C)The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
There are situations where the ABC test will not apply, and occupations where the Borello test may still apply under Labor Code section 2750.3, including certain:
- Licensed insurance agents and brokers
- Licensed physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians
- Licensed attorneys, architects, engineers, private investigators and accountants
- Registered securities broker-dealers or investment advisers or their agents and representatives
- Direct salespersons
- Licensed commercial fishermen (only through December 31, 2022 unless extended by the Legislature)
- Newspaper distributors or carriers (only through December 31, 2020 unless extended by the Legislature)
Source: State of California, Department of Industrial Relations
The complex law leaves much for interpretation, especially with its use of ambiguous language like “free from the control and direction” and “outside the usual course” of the hiring company’s business.
Construction-Related Trucking Exception
Some occupations and contracting relationships may still be subject to the Borello test in place of the ABC test. For instance, most subcontractors that provide construction trucking services for which a contractor’s license is not required may be exempt from the ABC test if all of the following criteria are met:
(i) The subcontractor is a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation.
(ii) For work performed after January 1, 2020, the subcontractor is registered with the Department of Industrial Relations as a public works contractor pursuant to Section 1725.5, regardless of whether the subcontract involves public work.
(iii) The subcontractor utilizes its own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor who operates their own truck to perform the entire subcontract and holds a valid motor carrier permit issued by the Department of Motor Vehicles.
(iv) The subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor
(B) For work performed after January 1, 2020, any business entity that provides construction trucking services to a licensed contractor utilizing more than one truck shall be deemed the employer for all drivers of those trucks.
(C) For purposes of this paragraph, “construction trucking services” means hauling and trucking services provided in the construction industry pursuant to a contract with a licensed contractor utilizing vehicles that require a commercial driver’s license to operate or have a gross vehicle weight rating of 26,001 or more pounds.
(D) This paragraph shall only apply to work performed before January 1, 2022.
(E) Nothing in this paragraph prohibits an individual who owns their truck from working as an employee of a trucking company and utilizing that truck in the scope of that employment. An individual employee providing their own truck for use by an employer trucking company shall be reimbursed by the trucking company for the reasonable expense incurred for the use of the employee owned truck.
Source: CA AB 5 /Labor Code 2750.3 (8)(A) Paragraph (2)
While the law doesn’t currently require the trucker to have a license from the Contractors State License Board, it does require them to be registered with the Department of Industrial Relations (DIR) as a public works contractor. Additionally, the construction trucking exception expires on January 1 of 2022, so it will be important to watch legislation closely to stay in front of any changes.
For work still subject to the ABC test, there is confusion about section “B”, which states that independent contractors be used to perform work outside of a contractor’s normal scope of work. Since the general contractor/sub-contractor relationship passes both the “A” and “B” aspects of the test, many experts currently see this relationship in general as exempt from “B.”
According to, Peter Tateishi, CEO of the Associated General Contractors of California (AGCC), subcontractors with a state license are exempt from the “B” section of the law. This means general contractors could self-perform the work they typically subcontract out. Source: Construction Dive
The industry as a whole will need to watch future court cases for direction from the Department of Industrial Relations to provide further clarification.
AB 5 penalties for misclassifying workers
California’s wage and hour laws, among other protections, apply to all workers that are classified as employees. This includes things like minimum wage, overtime, rest breaks and meal periods. It also includes workplace safety laws and retaliation laws to protect those that raise concerns about safety or other labor practices.
Independent contractors are not subject to many of California’s wage and hour laws, and they can’t go to the Labor Commissioner’s Office to settle disputes. They do, however, retain autonomy and freedom as independent contractors. Not only can they decide what contracts they want and walk away from those they don’t, they have more control over their time.
For California businesses, mistakes in classifying employees can mean paying heavy penalties. In addition to the penalties that can be assessed for wage violations that can occur due to the misclassification, there are civil penalties for willful misclassification. These fines range from $5,000 to $25,000 per violation.
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The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.
