Lisa Martinelli, Esq.
In January 2020, California Labor Code §2750.3 will take effect, establishing – and further defining – the guidelines for determining who is an employee and who is an independent contractor in California. These guidelines, and their necessary implications, will affect the rights, benefits and protections that inure to those working and those for whom they work. The full text of the statute is available HERE.
The legislation previously known as “AB 5” received extensive publicity, particularly for ride hailing and delivery service drivers, i.e., such companies as Uber, Lyft and DoorDash, who would now – at least theoretically – be classified as employees. These companies have, in turn, vowed to fight this change and are presently working on getting a ballot initiative qualified on the November 2020 ballot exempting their industry from the law’s provisions. Yet, while the “gig economy” has been the subject of the most publicity, this statute appears broader than that, with some very significant carve-outs and exceptions, and with other industries looking to be granted their own exemptions.
Essentially, the statute arises from the California Supreme Court decision in Dynamex Operations West Inc. v. Superior Court (2018) 4 Cal. 5th 903. In that case, the court was asked to determine whether the drivers working for Dynamex, a personal delivery service, were independent contractors as they were classified by the company or were actually employees. The case had been previously certified as a class action on behalf of drivers who alleged they were employees and entitled to the benefits that classification required. After analyzing the case law on this subject, the court created a presumption that a worker who performs services for a hiring entity is an employee. It then adopted a three-part test to determine whether a worker is an independent contractor. Now, in order for a hiring entity to properly classify a worker as an independent contractor, it must be able to demonstrate that the worker fits within the criteria of the “ABC Test”:
(A) The person is free from the control and direction of the hiring entity in fact as well as by contract;
(B) The work performed by the person is outside the usual course of the hiring entity’s business; and
(C) The person hired is customarily engaged in an independently established trade, occupation, or business.
Using this analysis, the court easily determined that the Dynamex drivers were employees. But, the opinion was obviously not limited to Dynamex and its workers, instead potentially foreshadowing a propound effect on the classification of California workers and the people who hire them. It was clear from the start that many workers who had been classified as independent contractors would now be reclassified under the so-called “ABC Test.” While this was cause for elation for some, it made many people in the business community – along with some workers who embraced their independent contractor status – nervous.
It is estimated that hiring someone as an employee rather than as an independent contractor can add 20% to 30% to labor costs, including such things as Social Security and Medicare taxes, unemployment and disability insurance, worker’s compensation, sick leave, minimum wage, overtime, rest breaks, and protections against discrimination and sexual harassment. Certainly, this raises the proverbial eyebrows of those working and those hiring.
In response to Dynamex, the California legislature introduced AB 5 which sought to codify the opinion, including its presumptions and the three-part “ABC Test.” But in so doing, the legislature sought to “clarify” its application. No doubt due to extensive lobbying by several industry groups potentially affected by the new criteria, the statute in its final form wound up adding several explicit exemptions to the new law. Those exemptions include: (i) healthcare professionals such as physicians, dentists, psychologists, and veterinarians licensed in California; (ii) licensed lawyers, architects, engineers, private investigators, and accountants; (iii) securities brokers and investment advisors; (iv) individuals licensed by the Department of Insurance; (v) direct salespersons who otherwise meet Unemployment Code conditions; (vi) real estate licensees; and (vii) “certain” commercial fisherman.
In addition, the statute provides that it does not apply to a contract for “professional services” provided to a hiring entity. “Professional services” includes marketing (under certain circumstances), human resources (also under certain circumstances), graphic design and freelance photography, fine art, freelance writing, and cosmetology and barber services so long as these professionals meet certain enumerated criteria. There are also exceptions and special rules for business-to-business contracts and subcontractors in the construction industry, but this again requires that a list of criteria be met for these exemptions to apply.
Despite all of these “carve-outs,” there are additional entities that feel their industry should also be exempted from this law, including trucking (which has the added complication of federal preemption), entertainment, and translators and interpreters.
There is no question that all of these interest groups and many others, including those members of the gig economy that have made this law their cause celebre, will be back at the next legislative session to again make their voices heard that Labor Code § 2750.3 should not apply to them. The conclusion to be drawn is that this is a fluid and developing area of law, set off by the decision in Dynamex. Certainly, there will be continuing developments, and employers – and all “hirers” – need to be informed of all of these continuing developments.
The attorneys at Berman, Berman, Berman, Schneider & Lowary LLP can address any questions you have regarding the above, and they are uniquely qualified to provide additional insight and guidance.