There are currently two competing Assembly Bills in the California State Assembly that illustrate the ongoing debate on how to address independent contractor classification.
Assembly Bill AB 5 was introduced by California Assembly Member Lorena Gonzales and it proposed codifying the ABC test as set forth in Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903 (2018).
Assembly Bill AB 71 was introduced by Assembly Member Melissa Melendez. This bill seeks to abandon the ABC test and to return to the multi-factor test utilized in California before the Dynamex decision.
What does it all mean? The ABC test is stricter than the multi-factor test. The presumption is that all workers are employees and therefore the hiring entity must prove all three criteria to establish that a worker is a valid independent contractor:
(A) that 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) 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.
The argument made for the policy behind the ABC test is that is more appropriate to use today in order to protect to misclassified workers who are denied workplace protections that are provided to employees. In addition, misclassification is unfair to companies who do not misclassify workers and leads to losses of revenue to state agencies who do not collect taxes, premiums for workers compensation, social security, unemployment and disability.
However, many businesses argue that the ABC test undermines the growth of the gig economy as it is too rigid and will be very harmful to all the businesses currently utilizing independent contractors in California. Companies that use independent contractors to deliver or provide their core product or service will have a difficult time proving that “(B) the worker performs work that is outside the usual course of the hiring entity’s business”. The ABC test creates a much higher risk of misclassification.
Businesses also argue that the multi-factor test – similar to the law before the Dynamex decision, as set forth in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341, (Borello test) – is a more relevant and appropriate test to address classification of independent contractors utilized in all of the different industries today.
Assembly Bill 71 addresses the arguments set for by businesses and provides:
(a) Notwithstanding any other law, a determination of whether a person is an employee or an independent contractor for the purposes of this division shall be based on the multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.
(b) These factors include, but are not limited to, the following:
(1) Whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired, which is the principal factor.
(2) Whether the one performing services is engaged in a distinct occupation or business.
(3) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision.
(4) The skill required in the particular occupation.
(5) Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work.
(6) The length of time for which the services are to be performed.
(7) The method of payment, whether by the time or by the job.
(8) The right to discharge at will, without cause.
(9) Whether or not the work is part of the regular business of the principal.
(10) Whether or not the parties believe they are creating the relationship of employer-employee.
(c) The individual factors set forth in subdivision (b) above shall not be applied mechanically as separate tests, but shall be intertwined.
(d) The test set forth in this section shall apply to any determinations before an administrative agency or court.
Conclusion: These two California Assembly Bills make it clear that the debate over how to address independent contractor classification will continue on as the gig economy continues to grow. Assembly Bill 5 is a spot bill for now that will be substantively replaced at a later date. Assembly Bill 71 is sponsored by Republican Melissa Melendez and has little chance of support in the California Assembly currently controlled by Democrats.
Legislators will continue to work on this legislation, but resolution on the classification analysis will not be cleared up in the near future. For now, classification tests will depend the claim. For example, while Dynamex holds that the ABC test applies to Wage and Hours Law, the California Workers Compensation Appeals Board still applies the Borello test.
Businesses engaging independent contractors should be aware of the risks involved with engaging independent contractors and consult with experts, such as iWorkGlobal, for advice on how to address compliance with the laws governing this important issue.
Geoff Mohun is General Counsel and the Chief Compliance Officer for iWorkGlobal. He has a Juris Doctorate from John F. Kennedy School of Law and is a graduate of California State University, Chico. He was admitted to the State Bar of California in 1997. Connect with Geoff on LinkedIn.