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California Expands the Reach of Dynamex ABC Test with AB 5

As covered on this blog, California has been taking steps to limit the classification of workers as independent contractors. While this has taken on different forms, including the monumental Dynamex decision, the state legislature recently finalized its own measure with the passage of AB 5 to codify the ABC test set forth in Dynamex. The passage of the bill largely overhauls employment law across the state.

The bill is plainly meant to target the continually growing gig economy, particularly companies like Uber and Lyft. However, the law has far-reaching implications for workers across a number of industries, including health care workers and truck drivers.

AB 5, in essence, codifies the employee vs. independent contractor test set out by Dynamex. As a reminder, the Dynamex decision looked at how to determine if a worker is an employee or an independent contractor. Previously, the so-called Borello test looked at a number of different factors to make this determination. However, the Dynamex court scrapped this in favor of the ABC Test.  For a worker to be an independent contractor under the ABC Test, the hiring entity must prove all three of the following:

(1) 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;

(2) that the worker performs work that is outside the usual course of the hiring entity's business; and

(3) that the worker is customarily engaged in an independently established trade, occupation, or business.

Again, all three of the factors above must be satisfied in order for a worker to be deemed an independent contractor.

The ABC Test is far stricter than the prior rule. It likely leaves many workers who have operated for years as independent contractors in their industry suddenly classified as employees.

While there was some debate as to the scope of Dynamex, AB 5 essentially puts it all to rest, making the ABC Test the law for nearly all workers, with some exemptions permitted for workers such as lawyers, doctors, and insurance brokers.

Aside from those provided exemptions in the law, the ABC Test appears to make it extraordinarily difficult for industries such as trucking to maintain any version of the system they've operated under previously, in which manytruck drivers were treated as independent contractors. It is certain that this law will impact the entire industry, and numerous others, requiring a complete overhaul of the way they've operated for years previously.

The law itself was ostensibly designed to protect workers in a new era with more and more of the population being involved in the gig economy and little in the way of the protections available to employees, such as minimum wage guarantees, paid time off, and health care.

However, there are also concerns that the law overreaches, negatively impacting industries that don't require the protection the law is meant to provide or taking away the flexibility some in the gig economy appreciate by being able to work as independent contractors. AB 5 makes it very difficult for individuals to start their own business by first working for a large company within their industry. Many of California's largest trucking companies started as small operations with one driver and one truck and a strong entrepreneurial spirit. That approach to starting a company appears blocked by AB 5.

The passage of the law sets up a fascinating, and potentially turbulent, time ahead. Companies like Uber and Lyft will have to completely readjust their business model, and potentially determine if a new model, in fact, works for them. This coming on the heels of recent disappointing IPOs.

Uber and Lyft are thought to be considering backing a ballot initiative in California that would legalize gig workers. Others are bringing very specific challenges. For example, the California Trucking Association is challenging application of the ABC Test to truck drivers subject to federal regulation on the theory that federal law preempts the test. We anticipate that when AB 5 becomes effective in January it will create a rash of litigation brought by workers claiming they have been misclassified and by workers (and companies) seeking to retain independent contractor classifications.

With AB 5 essentially rewriting California employment law, it is more important than ever for employers to have experienced employment and transportation lawyers on their side to navigate changes and make sure they comply with the new law and avoid being hit with potentially devastating lawsuits.

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