California’s New Independent Contractor Law (A.B. 5) Recently Came into Effect and It May Affect You
California recently passed A.B. 5 which creates new laws for determining whether a worker should be classified as an independent contractor or employee.
The new law was aimed at delivery and ride-sharing companies like Uber or Postmates, but the language of A.B. 5 covers many more industries.
Really any business owner that works with independent contractors needs to be aware of this new rule and determine whether their business needs to make adjustments now that the new rule kicked in on January 1, 2020.
If your business works with independent contractors, read on.
The Old Independent Contractor Rule – the Borello Test.
Since 1989, the primary test for determining whether a worker was an employee or independent contractor was governed by a case called S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (Borello). The court in Borello came up with a multi-factor test for determining whether a person was an independent contractor or an employee; the most significant factor being whether the company has control over the work done and the manner and means in which it is performed. In addition to the “control” element the court also looked to other factors including:
Whether the worker is engaged in a business distinct from that of the company;
Whether or not the work is a part of the regular business of the company;
Whether the company or the worker supplies the instruments, tools, and place for the worker;
The worker’s investment in the equipment or materials required to complete the work;
Whether the service rendered requires a special skill;
Whether the kind of occupation is usually done under the direction of the principal or by a specialist without supervision;
The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
The length of time for which the services are to be performed;
The degree of permanence of the working relationship;
The method of payment, whether by time or by the job; and,
Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, as well.
Using the Borello test requires a very fact intensive analysis of the day-to-day relationship between the company and the worker and would often lead to different results depending on the weight of the analysis. But for decades, this test applied to most California employment laws to determine whether someone was an independent contractor or an employee.
The court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex) said the Borello test did not apply under California wage orders. Instead, in the context of a wage order, the court should apply the “ABC Test.”
The ABC Test imposes a significantly higher burden on companies than the Borello test and makes it more difficult to establish an independent contractor relationship. The ABC Test states that an employer/employee relationship shall be presumed UNLESS the company can prove all three of the following factors:
(A) that the worker is free from 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) that the worker performs work that is outside the usual course of the hiring entity’s business; and,
(C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
After the ruling in Dynamex came out, employers questioned whether the holding would be limited to the wage order context, or if courts would expand the test to all employment relationships.
The legislature made the decision for the courts and passed A.B. 5.
In October 2019, California passed into law A.B. 5, which expands the holding in Dynamex to independent contractor classification claims under the California Labor Code and Unemployment Insurance Code, with some exceptions – not just in the wage order context.
However, this sweeping legislation also wrote in approximately 35 exemptions. If a company or worker falls within one of the exceptions, the Borello test, or some other statutory framework --- not the ABC Test --- will be used to determine whether a worker should be classified as an independent contractor or an employee.
The Bottom Line for Business Owners?
If you work with independent contractors, you need to be aware of this new rule. The potential fines and penalties associated with an audit and misclassification action can be significant. If you have questions about whether the new independent contractor laws apply to your business, or if a contractor falls within one of the exemptions contact Kevin A. James.
Kevin A. James is a business attorney in Placerville, CA. He helps business owners navigate the complex legal landscape in California with the goal of making his client’s businesses more profitable and simpler to operate. He can be reached at
email@example.com or (530) 295-6400.