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By Guest Author: Tiffany J. Israel and Colin Tanner, partners at Aleshire & Wynder, LLP

This article briefly summarizes Assembly Bill (AB) 5 and AB 170, which will became effective on January 1, 2020, and highlights the key impacts of these bills on special districts. These new laws reflect the state legislature’s objective of ensuring workers are not misclassified as independent contractors rather than employees, and which misclassification they believe deprives workers of the benefits afforded to employees under the law. It also codifies the “ABC test” adopted by the California Supreme Court in its recent decision in Dynamex Operations W. v. Superior Court[i] and creates a rebuttable presumption that a worker is an employee rather than an independent contractor.

This is a developing area of law.  Legislative changes and court decisions in coming years will clarify how this law is intended to apply to employers including special districts. 

Summary of Key Takeaways and Recommendations

• Most significantly, AB 5 presumes employment status and codifies the 3-prong “ABC” test[ii] for determining whether an employer can rebut the presumption and claim independent contractor status. The “ABC” test makes it easier for workers to prove status as an employee. 
• Under the “ABC” test, a worker will be presumed to be an employee rather than an independent contractor unless the hiring entity can show: 1) the worker is free from the direction and control of the hiring entity; 2) the work performed is outside the usual course of the hiring entity’s business; and 3) the worker is customarily engaged in an independently established business of the same nature as that involved in the work performed.
• Certain professions and types of arrangements are expressly exempted from the application of AB 5 such as lawyers, architects, engineers, private investigators, and accountants.
• The significance of the distinction between employee and independent contractor is that employee status triggers legally mandated benefits, protections, and taxation. AB 5 will likely have minimal impacts in situations where employees of bona fide third-party entities are providing services to a special district, but until there are cases specifically addressing the issue, nothing is certain.  In any event, existing joint employer liability rules will still apply where special districts hire agencies to supply workers. 

Recommended Next Steps

• Special districts should examine all current independent contractor relationships applying the “ABC” 3 prong test. This is a useful framework for identifying risky independent contractor arrangements, even those where the Borello[iii] common law test will still apply.
• If there are workers classified as independent contractors who do not satisfy each of the “ABC” test prongs, then special districts should consider the following actions: i) determine whether an exemption from AB 5 applies based on the worker’s occupation or type of arrangement with the special district; and ii) analyze whether reclassifying the worker or restructuring the independent contractor arrangement is necessary.

Legal Background

On September 18, 2019, Governor Gavin Newsom signed Assembly Bill No. 5, which codifies aspects of the decision of the California Supreme Court in the case of Dynamex Operations W. v. Superior Court[iv]. Dynamex dealt with the issue of whether an individual worker should be classified as an independent contractor or an employee in the context of wage orders. The result of Dynamex and the codification of its holding in AB 5, is that many workers who were formerly classified as independent contractors will now likely be deemed employees under California law.  While the Dynamex decision had retroactive application, the bulk of the provisions of AB 5 did not take effect until January 1, 2020. 

Prior to the California Supreme Court’s decision in Dynamex, employers in California, including public sector employers, had long used the more complicated and numerous factor test set forth in a previous California Supreme Court case, S. G. Borello & Sons, Inc. v. Department of Industrial Relations[v], to determine whether a worker was an employee or an independent contractor. In Borello, the Court set forth the following list of non-exclusive factors for use in determining the employment status of workers:

1. The right to control the manner and means of accomplishing the work (acknowledged as the most important 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. whether or not the work is a part of the regular business of the principal; and
9. whether or not the parties believe they are creating the relationship of employer-employee.

An employer determining whether an individual worker should be classified as an employee or an independent contractor could generally apply the Borello factors, and if most of the factors applied (in particular the critical factor of control), then the individual could be classified as an employee.

Conclusion

As of January 1, 2020, when a worker is determined not to be an employee under the “ABC” test or if the “ABC” test does not apply to the circumstances in your contract, the Borello factors should be applied to determine whether the relationship being established is really that of an independent contractor.

California’s Labor and Workforce Development Agency has established a new Employment Status Portal at labor.ca.gov/employmentstatus to provide information on AB 5 for both workers and employers. Analysis of employee versus independent contractor status is very fact specific.  We encourage you to contact your legal counsel with questions about your existing and future agreements.

This article was written by guest authors Tiffany J. Israel and Colin Tanner, partners at Aleshire & Wynder, LLP, as part of CSDA’s New Laws Series, where experts explain legislation passed in 2019 and how it will affect special districts moving forward. This article is provided for general information only and is not offered or intended as legal advice. Readers should seek the advice of an attorney when confronted with legal issues and attorneys should perform an independent evaluation of the issues raised in these materials.

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[i] Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903

[ii] Labor Code § 2750.3

[iii] S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341

[iv] Id.

[v] S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341