independent contractor v. employee: Assembly Bill 5 and the "ABC" Test

Whether a worker is classified as an employee or an independent contractor has great consequences for your business.  California law gives many benefits and protections to employees; independent contractors get virtually none.  For example, employees are generally entitled to, among other things, minimum wage and overtime; meal and rest breaks; reimbursement for work-related expenses; workers' compensation; and employer contributions to unemployment insurance.  Furthermore, employers are also required under the California Unemployment Insurance Code to withhold and remit to the state their employees' state income tax payments.  Independent contractors do not receive these protections.  

Effective January 1, 2020, California codified the “ABC” Test established in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018) to determine whether a worker is properly classified as an Independent Contractor vs. Employee via Assembly Bill (AB) 5.

In California, the hiring entity classifying the working individual as independent contractor bears the burden of establishing the proper classification. As of April 30th, 2018, a worker is automatically considered to be an employee under the California Wage Order and in order to classify a worker as an independent contractor, hiring companies must establish that all three of the following are true (the “ABC” Test): 

(A) The person 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 person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 broadens the reach of the Dynamex decision to apply to wage and hour Labor Code violations, as well as unemployment insurance and workers’ compensation and also creates certain exemptions from the rule.

What does this mean for California businesses? It is significantly more difficult to properly classify workers as Independent Contractors. Businesses who fail to re-examine their current worker classifications risk exposing their Company to significant liability in the form of backpay and penalties. 

Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding classification of your businesses’ workers, as well as to litigate any disputes related to classification.  Please contact us for a consultation.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.