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The California legislature is considering a bill that would enshrine the dubious state Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which essentially rewrote the standard for determining whether someone is an employee. The bill, known as AB 5, appears to be well on its way to becoming law, and it has already passed out of the state Assembly. Should the Senate concur and the governor sign the measure, the ability to utilize independent contractors without employment liability will be diminished for employers in the Golden State.
As this blog noted previously, the California Supreme Court in 2018 issued its ruling in Dynamex in which the court proclaimed that the test for establishing whether one is an employee should be far more rigid than the multi-factor standard that had been in place for almost thirty years. In its stead, the court declared that a much more restrictive “ABC” test should apply when evaluating whether an employment relationship exists between an individual and a purported employer.
Until 1989, courts in California generally had used the common law standard for determining employment status, but the state supreme court changed that when it established an eleven-factor test in its S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations decision that year.
In Dynamex, the court rejected the Borello test and replaced it with its own more onerous version of the ABC test that eliminates an important element found in other states. As the California court observed, in many states the ABC test “provide[s] that a hiring entity may satisfy part B by establishing either (1) that the work provided is outside the usual course of the business for which the work is performed, or (2) that the work performed is outside all the places of business of the hiring entity.” However, in its decision the court removed the second element, which will make it difficult to classify an individual as an independent contractor unless that person has essentially no connection to the employer’s business.
Thus, the California standard requires that a purported employer satisfy all three of the following conditions in order prove an individual is not an employee:
(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 of the same nature as the work performed.
As currently drafted, AB 5 declares that the “addition of the provision to the Labor Code does not constitute a change in, but is declaratory of, existing law.” Nevertheless, adopting the Dynamex standard via legislation would seem to preclude the state supreme court from altering that standard in a future case. For employers, the legislation will solidify a posture that is heavily biased against the use of independent contractors and could upend business models that rely on the flexibility they provide.