The ABC Test May Soon Be Law in California: What Employers Need to Know

On September 11, 2019, the California Assembly passed a bill codifying last year’s Supreme Court of California decision establishing a new test to determine whether a worker is an independent contractor or an employee. The new three-factor test, known as the ABC test, determines whether a company “employs” a worker under the wage orders, which address certain requirements for minimum wage, overtime, and meal and rest periods, among others. Assembly Bill (AB) 5 “would state the intent of the Legislature to codify” that decision and “clarify its application” to apply to all provisions under the Labor Code, unless specifically exempted.

AB 5 presumes that “a person providing labor or services for remuneration” is an “employee rather than an independent contractor” unless:

• “the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work,”
• “the person performs work that is outside the usual course of the hiring entity’s business,” and
• “the person is customarily engaged in an independently established trade, occupation or business.”

The text of the bill identifies the legislature’s intent in passing the act to be “to ensur[ing] workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” This bill, the law continues, “restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.”

The bill exempts several occupations from the application of the ABC test. The exempt occupations “include, among others, licensed insurance agents, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.” In addition, physicians, surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, private investigators, and accountants are exempted. Determinations of a worker’s employee or independent contractor status in these occupations would depend on the Borello test adopted in 1989.

The bill now awaits Governor Gavin Newsom’s signature. Newsom has previously expressed support for the legislation and is expected to sign it. The new law will take effect on January 1, 2020.