US: Some Independent Contractors in California Will Become Employees
Starting Jan. 1, 2020, employers in California will have to reclassify some independent contractors as employees under a new law (2019 Ch. 296), although certain sectors and occupations remain exempt. The legislation codifies and expands a 2018 decision by California’s Supreme Court (Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018)). Employers in California should review their independent contractor agreements and relationships to confirm correct classification for 2020.
The new law will reduce worker misclassification, “which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits,” the governor said in his signing message. He also announced plans to convene a meeting of the legislature, labor unions and the business community to discuss further changes to the law, such as collective bargaining rights for gig economy workers. For now, however, the new law focuses on correct classification of employees for wage and benefit protections, workers’ compensation, and unemployment insurance.
Classification of Workers
The legislation codifies and expands the use of criteria established in the 2018 Dynamex case. That decision created a presumption that a worker who performs services for a hirer is an employee for wage and benefit claims under wage orders issued by the Industrial Commission. To be classified as an independent worker, the individual must meet all three criteria in a so-called ABC test:
A — The hiring entity can’t control or direct what the worker does.
B — The worker must carry out tasks outside the hiring entity’s normal business activities.
C — The worker must be in an independently established trade, occupation or business.
Workers who don’t meet all three tests must be classified as employees. The new law adds the ABC test to the California Labor Code (for matters like expense reimbursement, wage statements and workers’ compensation) and the Unemployment Insurance Code. The ABC test will apply retroactively to existing claims and actions under wage orders and related Labor Code violations.
The ABC test will not apply to certain occupations, which instead will have employee or independent contractor status determined using a more lenient test from an earlier state supreme court decision (S.G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 769 P.2d 399 (Cal. 1989)). The Borello test considers various factors, especially who controls the worker. Examples of some occupations that will use this more lenient test include:
- Licensed insurance agents
- Certain licensed healthcare professionals
- Registered securities broker-dealers or investment advisers
- Direct salespersons
- Real estate licensees
- Commercial fishermen
- Workers providing licensed barber or cosmetology services
- Others performing work under a contract for professional services, with another business entity or pursuant to a subcontract in the construction industry
Individuals misclassified as independent contractors will be able to seek various remedies, including:
- Payment of unpaid minimum and overtime wages
- Premiums for missed or noncompliant meal and rest periods
- Reimbursement of expenses
- Penalties for noncompliant wage statements
- Civil penalties under the Private Attorneys General Act for Labor Code violations
- Workers’ compensation and unemployment insurance benefits
- Paid sick leave and family and medical leave
In addition, the California attorney general and city attorneys for cities with populations of more than 750,000 will be allowed to seek injunctive relief to prevent the continued misclassification of workers.
- 2019 Ch. 296 (California Legislature, Sept. 19, 2019)
- Bill Signing Statement (Governor’s Office, Sept. 19, 2019)
- Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018)
- S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 769 P.2d 399 (Cal. 1989)