California Bill Would Exempt Certain Occupations from Dynamex Ruling

Gig workers are not included in the exemptions

By Toni Vranjes April 9, 2019
California Bill Would Exempt Certain Occupations from Dynamex Ruling

When the California Supreme Court issued its 2018 ruling in Dynamex Operations v. Superior Court, the decision jolted the business world by making it more difficult to designate workers as independent contractors.

The decision was welcomed by labor, but it sparked great worry among employers. For one thing, the ruling opened the door to misclassification lawsuits against ride-hailing companies that rely on independent contractors for their business models to work. Now, both sides are closely watching a California bill, AB 5, that would codify the court decision and clarify how it would be applied to jobs in the state.

Although the bill would exempt certain occupations—such as doctors, investment advisors and some direct sellers—gig-economy workers aren't included in the exemptions. The business community is trying to change that, but the bill's sponsor, Assemblywoman Lorena Gonzalez, D-San Diego, doesn't want to exclude such workers from the bill's coverage.

"Individuals are not able to make it on three side hustles," she said. "That shouldn't be the norm. That shouldn't be accepted." Workers who are properly classified as independent contractors are not entitled to certain employment benefits such as minimum wage and overtime pay.

Stringent Contractor Test

In the Dynamex decision, the court adopted a new test for determining whether a worker should be designated as an employee or independent contractor under the California wage orders.

Under the "ABC" test, a worker is presumed to be an employee unless the employer can show all of the following:

  • 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.
  • The worker performs tasks that are outside of the usual course of the hiring entity's business.
  • 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.

The second factor is a difficult standard to meet, said Robert Cooper, an attorney with Buchalter in Los Angeles. Employers will have to show that the work performed is outside of the usual course of the business. So it would be difficult for a software development company to show that a programmer was properly classified as an independent contractor, but it may be able to show that a plumber is a contractor.

"I see this as a huge change that's going to cause employers to have to reclassify lots of people," said Craig Schloss, an attorney with Cozen O'Connor in San Diego.

Codifying the Standard

The Dynamex decision only applies to wage orders. If passed, the bill would extend the ABC test to all provisions of the California Labor Code unless another definition of "employee" is provided. So, for example, the ABC test would apply to a labor-code claim for wrongful termination in violation of public policy.

For the exempt occupations under AB 5, the California Supreme Court's test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations would apply. Under Borello, the primary factor for determining contractor status is whether "the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired."

As AB 5 moves through the state Legislature, the list of exempted occupations could expand.

The California Chamber of Commerce and other business groups recently sent a letter to the state Legislature stating that they would support the bill if it's amended to exempt more professions, including gig-economy drivers, truck drivers and other professionals "who all control when they work and for whom they work."

According to California Labor Federation spokesman Steve Smith, the bill is needed not only for clarity, but also to provide a stronger foundation for workers to seek justice. He wants to dispel the notion that employees can't have as much flexibility over their schedules and work as contractors. "The employer has the total ability to make that sort of flexibility a reality," he said. "It really doesn't have anything to do with whether you're an independent contractor or employee."

According to Cooper, the current version of AB 5, if passed, would be a major blow to companies like Uber and Lyft because they have numerous workers who are classified as independent contractors.

As currently written, the measure would apply the ABC test from Dynamex retroactively. According to Smith, discussions regarding the issue of retroactivity are ongoing.

"If it's deemed retroactive, and if there aren't more exemptions, it's going to be a huge burden on the on-demand economy … [for] truck drivers and transportation workers of all kinds," Cooper predicted.

Smith, however, said he believes these companies can still be financially successful, even if they have to transition many workers from independent-contractor to employee status.

Employers should take the issue of independent-contractor misclassification very seriously, noted Karen Tynan, an attorney with Ogletree Deakins in Sacramento. "It's an area where there can be incredibly stiff penalties and liabilities."

Toni Vranjes is a freelance business writer in San Pedro, Calif.



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