United States: The ABC Test is Here to Stay . . . California Governor Signs AB 5

Governor Gavin Newsom recently signed Assembly bill (AB) 5, codifying a Supreme Court of California decision establishing a new test to determine whether a worker is an independent contractor or an employee.

The ABC Test

According to the so-called ABC test, which the Supreme Court of California established in a 2018 case, a worker is an independent contractor only if the company hiring the worker establishes the following:

1. the worker is free from the control and direction of the hiring company “in connection with the performance of the work, both under the contract for the performance of the work and in fact”;
2. “the worker performs work that is outside the usual course of the hiring company’s business”; and
3. the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature” as the work performed for the hiring entity.

According to the court, a company’s “failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.”

Comment

AB 5 takes effect on January 1, 2020. The ABC test, however, already applies to several minimum labor standard requirements as a result of the state supreme court’s 2018 decision.

Governor Newsom stated that AB 5 “will help reduce worker misclassification . . . which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits.” Governor Newsom also expressed an intent to extend bargaining and organizing rights to workers:

Assembly Bill 5 is an important step. A next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work—all while preserving flexibility and innovation,”

Some commentators speculate that this statement is aimed at the gig economy. However, California’s support of organizing efforts may extend to trucking and other industries as well. As a result, California employers may be faced not only with the operational and litigation challenges presented by the new law, but also increased union activity resulting from organized labor’s efforts to leverage the AB 5.

Employers should note that in addition to codifying the ABC test, AB 5 contains carve-outs for several industries and professions including professional services, doctors, lawyers, real estate, insurance, referral agencies, and others, which will be subject to the multi-factor Borello test (or similar tests if they meet the conditions of the carve-outs). Several industries including the gig economy and trucking did not receive express carve-outs.

Written by Robert R. Roginson, Alexander M. Chemers, and Hera S. Arsen of Ogletree Deakins

© 2019 Ogletree, Deakins, Nash, Smoak & Stewart, P.C.