Existing law, as established in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), creates a presumption that a worker who performs services for a hirer is an employee. Existing law requires a 3-part test, commonly known as the ABC test, to establish that a worker is independent contractor.

This bill would state the intent of the Legislature to include provisions within this bill would codify the decision in the Dynamex case and clarify its application.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 5

Author:(Gonzalez)

As Amended Ver:September 6, 2019

Majority vote

SUMMARY:

Codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) that presumes a worker is an employee unless a hiring entity satisfies a three-factor test, and exempts from the test certain professions and business to business relationships.

The Senate Amendments:

1. Clarifies that if a court rules that the three-part Dynamex test cannot be applied to a particular context based on grounds other than an express exception to employment status as provided in this bill, then the determination of employee status shall instead be governed by the California Supreme Court's decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) (Borello).
2. Exempts from Dynamex, and instead applies the Borello test, to a number of additional occupations, including, but not limited to, podiatrists, veterinarians, psychologists, repossession agents, and commercial fisherman, as specified.
3. Redefines "professional services" for the purpose of coverage under the Borello test, to include, among other things, marketing, as defined, human resources administration, as defined, graphic design, grant writing, and services by fine artists and enrolled agents.
4. Clarifies the barbering and cosmetology exemption to Dynamex.
5. Clarifies the requirements for extending Borello to the relationship between a contracting business and a business service provider.
6. Clarifies the requirements for the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry to be governed by the Borello test, including the requirement of being licensed with the Contractors State License Board (CSLB).
7. Exempts, until January 1, 2022, a subcontractor providing construction trucking services from the requirement of having a CSLB license if certain criteria are satisfied, including registration with the Department of Industrial Relations as a public works contractor.
8. Requires, for work performed after January 1, 2020, that any business entity that provides construction trucking services to a licensed contractor utilizing more than one truck is the employer for all drivers of those trucks.
9. Establishes an exemption from Dynamex for motor club services and referral agencies, provided certain criteria are met.
10. Clarifies that the bill's provisions are declaratory of existing law and should apply retroactively to existing claims to the extent permitted by law.
11. Provides that, beginning on July 1, 2020, any individual who is deemed an employee must be covered by workers' compensation insurance.
12. Adds injunctive relief as a remedy to prevent continued misclassification.

COMMENTS:

The Dynamex decision was issued more than a year ago but debate over worker misclassification under our wage and hour laws continues to garner much attention. Worker misclassification is not a new concept. In fact, a 2000 study commissioned by the United States Department of Labor found that nationally between 10% and 30% of audited employers misclassified workers. As our workplaces and the nature of the employee-employer relationship evolves, new opportunities for misclassification have emerged. In 2017, California's Employment Development Department Tax Audit Program conducted 7,937 audits and investigations, resulting in assessments totaling $249,981,712, and identified nearly half a million unreported employees. Recent research also supports the prevalence of misclassification and finds some of the highest misclassification rates in the economy's growth industries, including home care, janitorial, trucking, construction, hospitality, security, and the app-based "on demand" sector.

According to the Author:

"The misclassification of workers is a clear detriment to working families, local businesses, and the state. This harmful practice undermines the hard-fought laws passed by the Legislature that have historically positioned California as a national leader in creating the strongest worker protections in the country. AB 5 codifies the ABC test prescribed in the Court's Dynamex ruling to help ensure that working Californians can retain all the rights and job protections afforded to employees under the California Labor Code."

Arguments in Support:

The California Labor Federation, sponsor of this bill, states that "unfairly labeling certain workers 'independent contractors' not only means those workers get no minimum wage or overtime, but it also means all the risk is shifted from a company to an individual. He or she must purchase and maintain a vehicle, pay for transportation expenses, and provide their own tools and supplies. They are not entitled to a safe workplace or protected from discrimination. That worker has no access to unemployment when the job ends, no workers' compensation if injured on the job, and no right to organize to improve conditions."

Arguments in Opposition:

The Southwest California Legislative Council, is opposed and states, "the rise of independent contractors has served to ignite large portions of the California economy, encourage entrepreneurship, and provide income for an estimated 4 million workers. Many of our members are local entrepreneurs who contract their services out to a variety of businesses, enabling them to benefit from multiple income streams."

FISCAL COMMENTS:

According to the Senate Appropriations Committee the Department of Industrial Relations indicates that it would incur first-year costs of $2.2 million, and $2.1 million annually thereafter, to implement the provisions of the bill (Labor Enforcement and Compliance Fund).

Total annual administration costs to the Employment Development Department would range between $2.5 million and $2.9 million.

VOTES:

ASM LABOR AND EMPLOYMENT: 5-0-2

YES: Kalra, Carrillo, Gonzalez, Jones-Sawyer, Luz Rivas

ABS, ABST OR NV: Flora, Diep

ASM APPROPRIATIONS: 13-3-2

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Brough, Fong, Obernolte

ABS, ABST OR NV: Bigelow, Diep

ASSEMBLY FLOOR: 59-15-6

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooper, Daly, Diep, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones‑Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NO: Bigelow, Brough, Chen, Choi, Dahle, Fong, Gallagher, Gray, Kiley, Lackey, Melendez, Obernolte, Patterson, Voepel, Waldron

ABS, ABST OR NV: Cooley, Cunningham, Flora, Eduardo Garcia, Mathis, Mayes

SENATE FLOOR: 29-11-0

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Borgeas, Chang, Dahle, Grove, Jones, Moorlach, Morrell, Nielsen, Stone, Wilk

UPDATED:

VERSION: September 6, 2019

CONSULTANT: Megan Lane / L. & E. / (916) 319-2091 FN: 0002392

 THIRD READING  

Bill No: AB 5

Author: Gonzalez (D), et al.

Amended: 9/6/19 in Senate

Vote: 21

SENATE LABOR, PUB. EMP. & RET. COMMITTEE: 4-1, 7/10/19

AYES: Hill, Jackson, Mitchell, Pan

NOES: Morrell

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/30/19

AYES: Portantino, Bradford, Durazo, Hill, Wieckowski

NOES: Bates, Jones

ASSEMBLY FLOOR: 59-15, 5/29/19 - See last page for vote

SUBJECT: Worker status: employees and independent contractors

SOURCE: California Labor Federation

State Building and Construction Trades Council

DIGEST:

This bill codifies the recent Dynamex decision, requiring that employers prove that their workers can meet a three part (ABC) test in order to be lawfully classified as independent contractors.

Senate Floor Amendments of 9/6/19 add additional occupations under the Borello test.

ANALYSIS:

Existing law:

1. Establishes a comprehensive set of protections for employees, including a time-sure minimum wage, meal and rest periods, workers’ compensation coverage in the event of an industrial injury, sick leave, disability insurance in the event of a non-industrial disability, paid family leave, and unemployment insurance. (Labor Code §§201, 226.7, 246, 512, 1182.12, & 3600 and UI Code §§1251 & 2601)
2. Creates the Industrial Welfare Commission (IWC), which promulgates industry-specific wage orders that set the wages, hours, and working conditions of employees. The IWC wage orders have the force of regulation and are enforced by the Division of Labor Standards Enforcement. (Labor Code §§70, 1173, 1177, 1195 & 1197)
3. Provides that there is a rebuttable presumption that a worker performing services for which a contractor’s license is required, or who is performing such services for a person who is required to obtain such a license, is an employee rather than an independent contractor. (Labor Code §2750.5)
4. States that in order to rebut the presumption described above, an employer must prove the following:
   1. That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor.
   2. That the individual is customarily engaged in an independently established business.
   3. That the individual’s independent contractor status is bona fide and not a subterfuge to avoid employee status. A bona fide independent contractor status is evidenced by the presence of cumulative factors, which includes substantial investment other than personal services in the business, holding out to be in business for oneself, and bargaining for a contract to complete a specific project for compensation by project rather than by time.

This test, also known as the ABC test, has been California law since 1979. (Labor Code §2750.5)

1. Requires that an individual holds a valid contractor’s license as a condition of having independent contractor status. (Labor Code §2750.5)
2. Requires, for the purposes of IWC wage orders, that the specific work conditions of a worker must conform with the following three circumstances to be considered an independent contractor:
   1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
   2. The worker performs work that is outside the usual course of the hiring entity’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.

(Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903)

This bill codifies and expands the recent decision in Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903. Specifically, this bill:

1. Provides that, for the purposes of the Labor Code and Unemployment Insurance Code and the IWC’s wage orders, where a definition for employee is not provided a person providing labor or services for remuneration must be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:
   1. The person 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. The person performs work that is outside the usual course of the hiring entity’s business.
   3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
2. Provides that, if a court of law rules that the three-part test above cannot be applied to a particular context based on grounds other than an express exception to employment status as provided in this bill, then the determination of employee or independent contractor status in that context shall instead be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).
3. Provides that, for the following occupations, the applicable test for determining if an individual is an employee or an independent contractor is the predecessor test to Dynamex developed by the California Supreme Court in Borello or relevant statute:
   1. Licensed insurance brokers.
   2. Licensed physicians and surgeons, dentists, podiatrists, psychologists, lawyers, architects, engineers, private investigators, veterinarians, and accountants, provided that the medical fields listed above are not covered by a collective bargaining agreement.
   3. Registered securities broker-dealers, investment advisors, or their agents and advisors.
   4. A direct salesperson, provided that the salesperson’s compensation is based on actual sales, rather than wholesale purchases or referrals.
   5. Commercial fisherman, except as per the provision of unemployment insurance benefits. This provision will become inoperative on January 1, 2023.
   6. Real estate licensees and repossession agents, as provided under existing licensure provisions in the Business and Professions Code.
4. Provides that the Borello employment test governs professional contracts if the contracting entity can demonstrate all of the following:
   1. The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing prevents an individual from choosing to perform services at the location of the hiring entity.
   2. If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
   3. The individual has the ability to set or negotiate their own rates for services performed.
   4. Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours.
   5. The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers for the same work.
   6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
5. Provides that an individual contracting for professional services can do so as a sole proprietor or other business entity.
6. Defines “professional services” as the following services:
   1. Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.
   2. Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
   3. Travel agents.
   4. Graphic design.
   5. Grant writer.
   6. Fine artist.
   7. Enrolled agent.
   8. Payment processing agent through an independent sales organization.
   9. Services provided by a still photographer, provided the individual does not license content to the putative employer more than 35 times in a year, as specified.
   10. Services provided by a freelance writer, provided the individual does not license content to the putative employer more than 35 times in a year, as specified.
7. Defines services provided by a licensed barber or cosmetologist as professional services, provided that:
   1. The worker sets their own rates and is paid directly by the clients.
   2. The worker has their own book of business and schedules their own appointments.
   3. The worker maintains their own business license for the services offered to clients.
   4. If the worker performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.
   5. Provides that the above shall become inoperative, with respect to licensed manicurists, on January 1, 2022.
8. Provides that relationships between a contracting business and a business service provider is under the Borello test if all of the following criteria are satisfied:
   1. The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   2. The business service provider is providing services to the contracting business rather than to customers of the contracting business.
   3. The contract with the business service provider is in writing.
   4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
   5. The business service provider maintains a business location that is separate from the business or work location of the contracting business.
   6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
   7. The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
   8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
   9. The business service provider provides its own tools, vehicles, and equipment to perform the services.
   10. The business service provider can negotiate its own rates.
   11. Concistent with the nature of the work, the business service provider can set its own hours and location of work.
   12. The business service provider is not performing the type of work for which a license from the Contractors State License Board (CSLB) is required, pursuant to Section 7000 and following of the Business and Professions Code.
9. Provides that the Borello test governs the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry if all of the following criteria are satisfied:
   1. The individual is free from the control and direction of the contractor in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   2. The subcontract is in writing.
   3. The subcontractor is licensed by CSLB and the work is within the scope of that license.
   4. If the is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
   5. The subcontractor maintains a business location that is separate from the business or work location of the contractor.
   6. The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
   7. The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
   8. The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
10. Exempts, until January 1, 2022, a subcontractor providing construction trucking services from the requirement of having a CSLB license if all of the following is satisfied:
    1. The subcontractor is a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation.
    2. For work performed after January 1, 2020, the subcontractor is registeredwith the Department of Industrial Relations as a public works contractor, regardless of whether the subcontract involves public work.
    3. The subcontractor utilizes its own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor who operates their own truck to perform the entire subcontract and holds a valid motor carrier permit issued by the Department of Motor Vehicles.
    4. The subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor.
    5. The licensed driver is licensed to operate a truck in excess of 26,000 pounds.
11. Requires, for work performed after January 1, 2020, that any business entity that provides construction trucking services to a licensed contractor utilizing more than one truck is the employer for all drivers of those trucks.
12. Clarifies that nothing above prohibits an individual who owns their truck from working as an employee of a trucking company and utilizing that truck in the scope of that employment. An individual employee providing their own truck for use by an employer trucking company must receive reimbursement from the trucking company for the reasonable expense incurred for the use of the employee owned truck.
13. Provides that a relationship between a service provider and a referral agency is exempt from the ABC test and under the Borello test if the following is applicable:
    1. The service provider has formed a business entity as a sole proprietor, partnership, limited liability company, limited liability partnership, or corporation.
    2. The service provider is free from the control and direction of the referral agency as a matter of contract and fact.
    3. If the work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
    4. If the work for the client requires the service provider to hold a state contractor’s license, the service provider has the required contractor’s license.
    5. The service provider delivers services to the client under service provider’s name, rather than under the name of the referral agency.
    6. The service provider provides its own tools and supplies to perform the services.
    7. The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
    8. The service provider maintains a clientele without any restrictions from the referral agency and the service provider is free to seek work elsewhere, including through a competing agency.
    9. The service provider sets its own hours and terms of work and is free to accept or reject clients and contracts.
    10. The service provider sets its own rates for services performed, without deduction by the referral agency.
    11. The service provider is not penalized in any form for rejecting clients or contracts. This subparagraph does not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.
14. Defines a referral agency as a business that connects service providers with clients and provides the following services: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup.
15. Provides that Dynamex and the ABC test does not apply to the relationship between a motor club holding a certificate of authority and an individual performing services pursuant to a contract between the motor club and a third party to provide motor club services utilizing the employees and vehicles of the third party and, instead, the determination whether such an individual is an employee of the motor club shall be governed by Borello, if the motor club demonstrates that the third party is a separate and independent business from the motor club.
16. Provides that the codification of the ABC test is not a change in law, but rather declaratory of existing law. Also provides that provisions above are declaratory of existing law and should apply retroactively to existing claims to the extent permitted by law.
17. Provides that the provisions above, except for the ABC test itself, apply to work on or after January 1, 2020.
18. Provides that, beginning on July 1, 2020, any individual who is an employee as described above must be covered by workers’ compensation insurance, but that this requirement is not retroactive to an earlier date.
19. Provides that, in addition to any other remedies available, an action for injunctive relief to prevent the continued misclassification of employees as independent contractors may be prosecuted against the putative employer in a court of competent jurisdiction by the Attorney General or by a city attorney of a city having a population in excess of 750,000, or by a city attorney in a city and county or, with the consent of the district attorney, by a city prosecutor in a city having a full-time city prosecutor in the name of the people of the State of California upon their own complaint or upon the complaint of a board, officer, person, corporation, or association.
20. Prohibits any employer from reclassifying an individual who was an employee on January 1, 2019, to an independent contractor due to this bill’s enactment.
21. Makes findings and declarations on Dynamex, the negative consequences of misclassification, and states that this bill is not a change in the law with regard to violations of the Labor Code relating to wage orders of the IWC.
22. Makes conforming and technical changes to existing provisions.

Comments

Brief Comments on Referral Agencies

As discussed above, AB 5 addresses the concept of referral agencies and service providers. Since the introduction of this language, several stakeholders have asked what referral agencies are and where this concept came from. As such, the staff comments below will briefly attempt to address this question.

As was noted in the Senate Labor Committee analysis, the core question when analyzing intermediaries in the Dynamex/AB 5 context is what purpose do they serve and is their fee proportionate to the service the intermediary provides. The referral agency language creates a concrete path for both existing and new referral agencies to follow and explicitly says what is a legitimate referral agency: an entity or website which connected rate-setting independent businesses to clients; assisted in rate setting by sending the independent business his or her set rate, without deduction, and billed the client for the service costs associated with running a referral agency; provided services that may be out of reach for a small independent business, like credit card payments, bill collection, and dispute resolution; and assisted the development of independent small businesses through exposure and other services.

The complication with referral agencies comes with their inclusion in the retroactivity provisions. In including referral agencies in the retroactive language, the Legislature is stating that they exist and should not face retroactive liability. Yet, this is an undefined concept until AB 5 becomes law. As such, the Legislature is extending retroactive protection to some existing companies and not others knowing that the companies that receiving this protection could not be in full compliance with AB 5 prior to January 1, 2020.

Where does that place enforcement entities and regulators? First, it is worth noting that the businesses covered by both the prospective and retrospective provisions of this bill are unique. Specifically, they require the contractor to engage in rate setting, and they require the contractor to market themselves as an individual. In short, someone using a referral agency is hiring a specific person for a specific task at a specific negotiated rate. They would not, for example, request a service from an agency and find out who would provide the service at a later date. Without direct communication and rate setting prior to the provision of the service, the entity is an employer, not a referral agency.

Second, an existing referral agency is going to remit the negotiated rate, including any potential gratuity, without deduction on the part of the contractor. If, for example, a contractor billed her services at $25/hour, it would be permissible for a referral agency to charge the client $35/hour and keep the $10 difference. It would not be permissible, however, to place the costs of the operation of the referral agency on the shoulders of the contractor.

Finally, the referral agency should not exert significant control over how a contractor does their contracted services. For example, a contractor should be able to select who they will provide services for prior to any work being performed. If work was simply directed to a contractor, then the entity directing the work is an employer, not a referral agency.

Errors and Omissions

As with any complex legislation, it is the norm that future clean-up legislation is necessary to sand down the rough edges and diminish the unseemly gap between the written word of legislation and the hazy hieroglyphics of everyday California. AB 5 is no exception.

For example, AB 5 provides a clean, unmistakable exemption for medical professionals (physicians and surgeons, dentists, and veterinarians) from Dynamex, instead placing these professions under the employment rules of Borello. However, this bill also states that if these same professions are covered by a collective bargaining agreement, then the Dynamex employment rules apply. For the sake of clarity, the Legislature may wish to clarify that, for medical professions not covered by a collective bargaining agreement, Borello applies in all situations, unless the medical professionals are covered by a collective bargaining agreement.

Similarly, recent amendments to the cosmetology licensee language, which creates a specific path for some cosmetology licensees to come under the Borello employment test, requires that the cosmetologist “processes their own payments”. Fundamentally, it is unclear what that means – no one is going to argue that AB 5 now requires all cosmetologists to create an interbank system for credit card payments. This language was designed to differentiate cosmetologists and referral agencies: while referral agencies process the payments from clients and then send the negotiated rate to the contractor (again, without deduction and with any potential gratuity), cosmetologists will handle their own payments. They may use a particular payment processor or booking software, and they may ask someone to run the actual processing of the payment for them, but the calculation and selection of the payment process belongs to the cosmetologist.

Both of these issues could benefit from clearer language in a 2020 clean-up bill.

NOTE: Additional Staff Comments are available in the Senate Labor, Public Employment and Retirement Committee analysis.

Related/Prior Legislation

AB 2496 (Gonzalez Fletcher, 2018) would have created a rebuttable presumption that a worker in the janitorial field is an employee, and therefore is due the same protections and privileges as other employees. Governor Brown vetoed the bill, stating the following in his veto letter:

I share the Author's concern about protecting the most vulnerable workers as well as the general concern about providing clarity regarding worker classification. The California Supreme Court recently issued a significant decision establishing a new test to determine whether a worker is properly classified as an employee or an independent contractor, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. The Administration and the Legislature are still reviewing this decision and any statutory changes to such tests would be premature.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• The Department of Industrial Relations indicates that it would incur first-year costs of $2.2 million, and $2.1 million annually thereafter, to implement the provisions of this bill (Labor Enforcement and Compliance Fund).
• Total annual administration costs to the Employment Development Department would range between $2.5 million and $2.9 million.
• Additionally, this bill could result in unknown, potentially significant costs to the Medi-Cal program. Staff notes skilled nursing facilities and intermediate care facilities employ contractors to provide physical therapy, occupational therapy, mental health services, and dietary services. To the extent this bill makes it more challenging for specified facilities to continue employing these contractors, Medi-Cal beneficiaries who reside in skilled nursing facilities and/or intermediate care facilities would have longer stays in institutional settings instead of returning to the community. In addition, if these independent contractors, or new employees qualify as an independent contractor, types of claims could shift significantly, either to reflect higher-cost of care or, potentially, lower preventative utilization in the short-term but costly services in the out-years.
• The Franchise Tax Board (FTB) indicates that this bill would likely result in some workers who are currently treated as independent contractors being reclassified as employees. This reclassification would shift responsibility for a number of business related expenses from workers to the businesses. A reduction of qualified business expenses will likely increase the tax liability of workers, while the increase in expenses will decrease the tax liability of many businesses. The net effect of these changes would depend on the marginal tax rates of the businesses and workers involved, and any adjustment that may take place in compensation levels or related business expenses, and is unknown, In addition, reclassified workers would receive W-2s reporting their wages to FTB. This would likely increase the level of compliance for these workers, thereby increasing tax revenues.

SUPPORT: (Verified 8/30/19)

California Labor Federation (co-source)

State Building and Construction Trades Council (co-source)

9 to 5

Amalgamated Transit Union

American Federation of State, County and Municipal Employees

Berkeley City Council

BlueGreen Alliance

California Alliance for Retired Americans

California Association of Health Underwriters

California Conference of Machinists

California Federation of Teachers

California Immigrant Policy Center

California Nevada Conference of Operating Engineers

California Nurses Association

California Partnership for Working Families

California Professional Firefighters

California Rural Legal Assistance Foundation

California School Employees Association

Center on Policy Initiatives, San Diego

Central Coast Alliance United for a Sustainable Economy

Communication Workers of America, District 9

Direct Selling Association

East Bay Alliance for a Sustainable Economy

Employees Rights Center

Engineers and Scientists of California, IFPTE, Local 20

Greater California Livery Association

Independent Insurance Agents and Brokers of California

Labor and Employment Committee of National Lawyers Guild

Legal Aid at Work

Los Angeles Alliance for a New Economy

National Association of Insurance and Financial Advisors of California

National Domestic Workers Alliance

National Employment Law Project

National Union of Healthcare Workers

Orange County Communities Organized for Responsible Development

Professional and Technical Engineers, IFPTE, Local 21

Professional Beauty Federation of California

SEIU CA

SEIU Local 1000

Shaklee Corporation

Sierra Club California

Southern California Coalition for Occupational Safety and Health

Teamsters Public Affairs Council

The Greenlining Institute

Union of Concerned Scientists

UNITE HERE

United Auto Workers, Local 2865

United Auto Workers, Local 5810

United Domestic Workers, AFSCME Local 3930

United Farm Workers

United Food and Commercial Workers Western States Council

University Professional and Technical Employees, CWA Local 9119

Warehouse Worker Resource Center, Inland Empire

Western Center on Law and Poverty

Western States Council of Sheet Metal, Air, Rail and Transportation

Worksafe

OPPOSITION: (Verified 8/30/19)

American Electrology Association

American Society of Travel Advisors

Anthony Hopkins Investigations

Associated Bodywork and Massage Professionals

California Aesthetic Alliance

California Association of Licensed Investigators

California Association of Winegrape Growers

California League of Food Processors

California Physical Therapy Association

California Society for Respiratory Care

California Trucking Association

City of Glendora

Coalition of DMV Motor Carrier Permit Holders

El Dorado County Joint Chambers Commission

Electrologists’ Association of California

Electronic Transactions Association

Elk Grove Chamber of Commerce

Folsom Chamber of Commerce

Forest Landowners of California

Hayward Chamber of Commerce

Insights Association

J & B Water Trucking

Lavell Water Truck Service LLC

National Federation of Independent Business

Pacific Seafood

Rancho Cordova Chamber of Commerce

Roseville Area Chamber of Commerce

Santoro Transportation Inc.

Southern California Contractors Association

TechNet

147 individuals

ARGUMENTS IN SUPPORT: State Building and Construction Trades Council, writing in support, argues the following:

Last April, the California Supreme Court by a unanimous ruling in Dynamex Operations v. Supreme Court established a stronger protection for workers by making it more difficult to misclassify them as independent contractors. Workers classified as employees have access to the Labor Code's economic security protections such as minimum wage, unemployment insurance benefits, workers’ compensation, and a jobsite free from discrimination and harassment.

The Supreme Court's Dynamex decision specifically mentions that wage and hour laws are "clearly intended for the benefit of those law-abiding businesses that comply with the obligations imposed by the wage orders, ensuring that responsible companies are not hurt by unfair competition from competitor businesses that utilize substandard employment practices." There is no doubt that all employers (old, new, large, mid-size or small) that follow the state's labor laws are severely disadvantaged when their competitors misclassify employees as independent contractors.

Construction has two sides, one that promotes rewarding careers with fair wages and benefits and another that is heavily burdened by the underground economy which depresses wages, denies basic benefits, undercuts good employers, neglects training, and incentivizes unsafe working conditions. Regrettably, construction employers routinely misclassify workers as independent contractors to save money, increase profits and to benefit from an unfair competitive advantage over contractors with employees.

Most recently, the State of California brought forward the largest wage-theft case against any employer citing a framing and drywall subcontractor for cheating over 1,000 workers of the minimum wage, overtime and rest breaks on construction projects throughout the Los Angeles region. The state ordered that over $11.94 million in back wages and penalties for violations between 2014-2017 was owed by RDV Construction to its employees.

In another case brought by the state's labor commissioner, Calcrete Construction was sued separately for $6.3 million for cheating 249 construction workers out of their properly owed wages on one of the same projects involving RDV Construction. The Division of Labor Standards and Enforcement (DLSE) also found Calcrete Construction guilty of misclassifying 175 construction workers as independent contractors. In fact, these workers were threatened with termination of employment if they resisted signing contracts that falsely stated their independent contractor status.

According to a recent study by the Economic Roundtable titled, "Sinking Underground-The Growing Informal Economy in CA Construction," misclassified construction workers earn $.64 cents of every dollar a formal employee earns. In addition, the Employment Development Department's misclassification audits from 2005-2007 recovered $111,956,556 in pay roll taxes, $18,537,894 in labor citations and $40,348,667 in employment tax fraud. Lastly, DLSE estimates that misclassification costs the state over $7 billion annually.

We strongly support AB 5 because it:

• Reinforces Labor Code protections for misclassified workers by codifying the Dynamex case (or ABC test) into the Labor Code.

• Assists the Labor Agency/DLSE's efforts to fight the underground economy and hold law breaking contractors accountable.

• Restores tax revenue for unemployment insurance, disability insurance, and employer contributions to the workers compensation system by preventing misclassification.

• Protects law-abiding contractors, including signatory contractors, from being at a competitive disadvantage.

There has not been a moment in recent history granting the Legislature with the ability to protect the most disadvantaged workers and address income inequality which continues to cause extreme poverty and suffering while businesses, corporations and Wall Street score record breaking profits. We believe AB 5 provides this opportunity as it will significantly improve the working conditions for those that are currently misclassified and suffering from wage-theft and the other negative consequences of being denied the protections under the state's labor code.

ARGUMENTS IN OPPOSITION: The National Federation of Independent Business (NFIB), writing in opposition to AB 5, argues the following:

As you know, prior to Dynamex California courts and state agencies had long applied what is known as the Borello test for determining whether a worker was an independent contractor for labor and employment purposes. The Borello test was a multi-factor approach which looked primarily at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service, along with eight other “secondary” factors. In Dynamex, the California Supreme Court decided to abruptly replace the Borello test in April of 2018.

Dynamex established a new “ABC” test, which provides that a worker must be treated as an employee unless the hiring entity can prove that the worker is: (A) free from control; (B) providing services unrelated to the hiring entity’s business; and (C) holding him or herself out as an independent business. This rigid formula prevents entrepreneurs from working as an independent contractor if they are providing services integral to another company’s business, regardless of what steps they have taken to establish themselves as a separate, independent business.

Fortunately, many policy leaders including yourself have acknowledged this new “ABC” test under Dynamex is unworkable for every single business in a state and economy as diverse as California’s. Unfortunately, the amendment process that has followed the introduction of AB 5 has left too many small businesses behind by narrowly carving out specific industries, rather than seeking to craft an exemption based on the nature of the contractual relationship between two entities. In a recent direct balloting of our California small business membership, 78% told us clearly that they wish to see a different approach, one that exempts two established, independent businesses from the “ABC” test, rather than picking and choosing industries.

Broad exemption from “ABC” test between two verifiably independent businesses:

NFIB small business members feel strongly that if, for example, a service provider has gone through the process of incorporating as an LLC or S-Corp, that business operator should be presumed exempt from the “ABC” test so that he or she may freely provide their services to other companies. Fundamentally, if two contracting entities can verify they operate freely and independently of one another, they should be held to the longstanding multi-factor test under Borello. Also known as a “business-to-business” exemption, this broad amendment would address the fundamental encumbrance of the “ABC” test, without picking winners and losers by carving out specific industries.

Eliminate unfair retroactive application of “ABC” test prior to April of 2018:

The sweeping action taken by the California State Supreme Court with Dynamex undoubtedly rewrote decades of California law by supplanting what was known as the Borello test with an unprecedented “ABC” test, never seen before in statue or regulation. In May of 2019, the U.S. Court of Appeals for the Ninth Circuit ruled that this unprecedented test could be applied retroactively, even when employers had no possible way of knowing about the “ABC” test. While Borello was certainly imperfect, NFIB small business members feel strongly it is unfair to punish employers for following the law of the land at the time, which was Borello for nearly three decades.

Independent contractor relationships provide millions of small business owners and entrepreneurs the opportunity to pursue their dreams, yet the rigid “ABC” test established by Dynamex and the threat of litigation presented by retroactive application jeopardize these opportunities. NFIB small business members respectfully urge the adoption of the two amendments described above to AB 5 to significantly alleviate these concerns.

ASSEMBLY FLOOR: 59-15, 5/29/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooper, Daly, Diep, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Dahle, Fong, Gallagher, Gray, Kiley, Lackey, Melendez, Obernolte, Patterson, Voepel, Waldron

NO VOTE RECORDED: Cooley, Cunningham, Flora, Eduardo Garcia, Mathis, Mayes

Prepared by: Gideon L. Baum / L., P.E. & R. / (916) 651-1556

9/9/19 18:33:21

**** END ****

 THIRD READING  

Bill No: AB 5

Author: Gonzalez (D)

Amended: 8/30/19 in Senate

Vote: 21

SENATE LABOR, PUB. EMP. & RET. COMMITTEE: 4-1, 7/10/19

AYES: Hill, Jackson, Mitchell, Pan

NOES: Morrell

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/30/19

AYES: Portantino, Bradford, Durazo, Hill, Wieckowski

NOES: Bates, Jones

ASSEMBLY FLOOR: 59-15, 5/29/19 - See last page for vote

SUBJECT: Worker status: employees and independent contractors

SOURCE: California Labor Federation

State Building and Construction Trades Council

DIGEST:

This bill codifies the recent Dynamex decision, requiring that employers prove that their workers can meet a three part (ABC) test in order to be lawfully classified as independent contractors.

ANALYSIS:

Existing law:

1. Establishes a comprehensive set of protections for employees, including a time-sure minimum wage, meal and rest periods, workers’ compensation coverage in the event of an industrial injury, sick leave, disability insurance in the event of a non-industrial disability, paid family leave, and unemployment insurance. (Labor Code §§201, 226.7, 246, 512, 1182.12, & 3600 and UI Code §§1251 & 2601)
2. Creates the Industrial Welfare Commission (IWC), which promulgates industry-specific wage orders that set the wages, hours, and working conditions of employees. The IWC wage orders have the force of regulation and are enforced by the Division of Labor Standards Enforcement. (Labor Code §§70, 1173, 1177, 1195 & 1197)
3. Provides that there is a rebuttable presumption that a worker performing services for which a contractor’s license is required, or who is performing such services for a person who is required to obtain such a license, is an employee rather than an independent contractor. (Labor Code §2750.5)
4. States that in order to rebut the presumption described above, an employer must prove the following:
   1. That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor.
   2. That the individual is customarily engaged in an independently established business.
   3. That the individual’s independent contractor status is bona fide and not a subterfuge to avoid employee status. A bona fide independent contractor status is evidenced by the presence of cumulative factors, which includes substantial investment other than personal services in the business, holding out to be in business for oneself, and bargaining for a contract to complete a specific project for compensation by project rather than by time.

This test, also known as the ABC test, has been California law since 1979. (Labor Code §2750.5)

1. Requires that an individual holds a valid contractor’s license as a condition of having independent contractor status. (Labor Code §2750.5)
2. Requires, for the purposes of IWC wage orders, that the specific work conditions of a worker must conform with the following three circumstances to be considered an independent contractor:
   1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
   2. The worker performs work that is outside the usual course of the hiring entity’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.

(Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903)

This bill codifies and expands the recent decision in Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903. Specifically, this bill:

1. Provides that, for the purposes of the Labor Code and Unemployment Insurance Code and the IWC’s wage orders, where a definition for employee is not provided a person providing labor or services for remuneration must be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:
   1. The person 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. The person performs work that is outside the usual course of the hiring entity’s business.
   3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
2. Provides that, if a court of law rules that the three-part test above cannot be applied to a particular context based on grounds other than an express exception to employment status as provided in this bill, then the determination of employee or independent contractor status in that context shall instead be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).
3. Provides that, for the following occupations, the applicable test for determining if an individual is an employee or an independent contractor is the predecessor test to Dynamex developed by the California Supreme Court in Borello or relevant statute:
   1. Licensed insurance brokers.
   2. Licensed physicians and surgeons, dentists, podiatrists, psychologists, lawyers, architects, engineers, private investigators, and accountants.
   3. Registered securities broker-dealers, investment advisors, or their agents and advisors.
   4. A direct salesperson, provided that the salesperson’s compensation is based on actual sales, rather than wholesale purchases or referrals.
   5. Commercial fisherman, except as per the provision of unemployment insurance benefits. This provision will become inoperative on January 1, 2023.
   6. Real estate licensees and repossession agents, as provided under existing licensure provisions in the Business and Professions Code.
4. Provides that the Borello employment test governs professional contracts if the contracting entity can demonstrate all of the following:
   1. The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity.
   2. If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
   3. The individual has the ability to set or negotiate their own rates for services performed.
   4. Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours.
   5. The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers for the same work.
   6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
5. Provides that an individual contracting for professional services can do so as a sole proprietor or other business entity.
6. Defines “professional services” as the following services:
   1. Marketing.
   2. Administrator of human resources.
   3. Travel agents.
   4. Graphic design.
   5. Grant writer.
   6. Fine artist.
   7. Enrolled agent.
   8. Payment processing agent through an independent sales organization.
   9. Services provided by a still photographer, provided the individual does not submit content to the putative employer more than 35 times in a year, as specified.
   10. Services provided by a freelance writer, provided the individual does not submit content to the putative employer more than 35 times in a year, as specified.
7. Defines services provided by a licensed barber or cosmetologist as professional services, provided that:
   1. The services are not provided by a manicurist, unless the manicurist is also a licensed cosmetologist.
   2. The worker sets their own rates and is paid directly by the clients.
   3. The worker has their own book of business and schedules their own appointments.
   4. The worker maintains their own business license for the services offered to clients.
8. Provides that relationships between a contracting business and a business service provider is under the Borello test if all of the following criteria are satisfied:
   1. The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   2. The business service provider is providing services to the contracting business rather than to customers of the contracting business.
   3. The contract with the business service provider is in writing.
   4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
   5. The business service provider maintains a business location that is separate from the business or work location of the contracting business.
   6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
   7. The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
   8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
   9. The business service provider has no other financial relationships with the contracting business.
   10. The business service provider can negotiate its own rates.
   11. The business service provider can set its own hours and location of work.
   12. The business service provider is not performing the type of work for which a license from the Contractors State License Board (CSLB) is required, pursuant to Section 7000 and following of the Business and Professions Code.
9. Provides that the Borello test governs the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry if all of the following criteria are satisfied:
   1. The individual is free from the control and direction of the contractor in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   2. The subcontract is in writing.
   3. The subcontractor is licensed by CSLB and the work is within the scope of that license.
   4. If the is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
   5. The subcontractor maintains a business location that is separate from the business or work location of the contractor.
   6. The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
   7. The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
   8. The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
10. Exempts, until January 1, 2022, a subcontractor providing construction trucking services from the requirement of having a CSLB license if all of the following is satisfied:
    1. The subcontractor is a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation.
    2. For work performed after January 1, 2020, the subcontractor is registeredwith the Department of Industrial Relations as a public works contractor, regardless of whether the subcontract involves public work.
    3. The subcontractor utilizes its own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor who operates their own truck to perform the entire subcontract and holds a valid motor carrier permit issued by the Department of Motor Vehicles.
    4. The subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor.
    5. The licensed driver is licensed to operate a truck in excess of 26,000 pounds.
11. Requires, for work performed after January 1, 2020, that any business entity that provides construction trucking services to a licensed contractor utilizing more than one truck is the employer for all drivers of those trucks.
12. Clarifies that nothing above prohibits an individual who owns their truck from working as an employee of a trucking company and utilizing that truck in the scope of that employment. An individual employee providing their own truck for use by an employer trucking company must receive reimbursement from the trucking company for the reasonable expense incurred for the use of the employee owned truck.
13. Provides that a relationship between a service provider and a referral agency is exempt from the ABC test and under the Borello test if the following is applicable:
    1. The service provider has formed a business entity as a sole proprietor, partnership, limited liability company, limited liability partnership, or corporation.
    2. The service provider is free from the control and direction of the referral agency as a matter of contract and fact.
    3. If the work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
    4. If the work for the client requires the service provider to hold a state contractor’s license, the service provider has the required contractor’s license.
    5. The service provider delivers services to the client under service provider’s name, rather than under the name of the referral agency.
    6. The service provider provides its own tools and supplies to perform the services.
    7. The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
    8. The service provider maintains a clientele without any restrictions from the referral agency and is free to seek work elsewhere, including through a competing agency.
    9. The service provider sets its own hours and terms of work and is free to accept or reject clients and contracts.
    10. The service provider sets its own rates for services performed, without deduction by the referral agency.
    11. The service provider is not penalized in any form for rejecting clients or contracts. This subparagraph does not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.
14. Defines a referral agency as a business that connects service providers with clients and provides the following services: graphic design, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, web design, picture hanging, pool cleaning, and yard cleanup.
15. Provides that the codification of the ABC test is not a change in law, but rather declaratory of existing law. Also provides that provisions above are declaratory of existing law and should apply retroactively to existing claims to the extent permitted by law.
16. Provides that the provisions above, except for the ABC test itself, apply to work on or after January 1, 2020.
17. Provides that, beginning on July 1, 2020, any individual who is an employee as described above must be covered by workers’ compensation insurance, but that this requirement is not retroactive to an earlier date.
18. Prohibits any employer from reclassifying an individual who was an employee on January 1, 2019, to an independent contractor due to this bill’s enactment.
19. Makes findings and declarations on Dynamex, the negative consequences of misclassification, and states that this bill is not a change in the law with regard to violations of the Labor Code relating to wage orders of the IWC.
20. Makes conforming and technical changes to existing provisions.

Comments

Independent Contractors, Borello, and Dynamex

The cornerstone of Labor Law is the employer-employee relationship. Specifically, the employer-employee relationship is a social contract: the employer provides wages and benefits (some legally required) to the employee, in return for the employee’s labor, time, and intellectual and/or physical product. The legal roots of this relationship go back to Medieval England, yet are durable enough to shape our current world.

In the past 30 years, this relationship has been put under pressure and strain due to the increasing utilization of independent contractors. For employers who lawfully utilize independent contractors, it allows a business to utilize the services of a skilled individual for specific tasks. The employer trades control over the working conditions for being released from many of the primary obligations of being an employer, including paying overtime, remitting payroll taxes, securing workers’ compensation coverage, and ensuring a healthy and safe work environment.

This creates a tremendous incentive for employers to misclassify their employees and illegally avoid paying the cost of benefits. This amounts to a cost-shift from an employer to the employee specifically and, in the case of particularly egregious examples, the people of California generally in the form of increased safety net spending. And it may be a growing issue: according to a 2016 study conducted by Alan Krueger, the number of workers classified as independent contractors rose 30% from 2005 to 2015.

In short, misclassification impacts all Californians, not just the Californians who are misclassified, and may be getting worse, rather than better.

This challenge was further exacerbated because the primary court precedent was less than precise on who was and who was not an independent contractor. Specifically, in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341, the California Supreme Court created an 11 point “economic realities” test on whether someone could lawfully be considered an independent contractor. Outside of particularly clear-cut or egregious situations, this made determining who was or was not an independent contractor complicated, expensive, and prone to litigation. This created considerable frustration for both worker and employer stakeholders.

However, this period of considerable confusion appears to be drawing to a close. Earlier this year, the California Supreme Court revisited the independent contractor issue in Dynamex Operations West v. Superior Court (2018). Under Dynamex, the test for whether a worker is an independent contractor or an employee is a greatly simplified to a three-prong test:

(A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) The worker performs work that is outside the usual course of the hiring entity’s business; and

(C) 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.

While a similar ABC test has been in place for the construction industry for almost 40 years (and predates the Borello test by a decade), the Dynamex decision has created significant controversy in the employer community. AB 5 codifies the Dynamex decision, while also expanding its scope to areas of Labor Law beyond the IWC wage orders. Additionally, AB 5 provides narrow exemptions from Dynamex for specific industries, placing them instead under the broader Borello test.

NOTE: Additional Staff Comments are available in the Senate Labor, Public Employment and Retirement Committee analysis.

Related/Prior Legislation

AB 2496 (Gonzalez Fletcher, 2018) would have created a rebuttable presumption that a worker in the janitorial field is an employee, and therefore is due the same protections and privileges as other employees. Governor Brown vetoed the bill, stating the following in his veto letter:

I share the Author's concern about protecting the most vulnerable workers as well as the general concern about providing clarity regarding worker classification. The California Supreme Court recently issued a significant decision establishing a new test to determine whether a worker is properly classified as an employee or an independent contractor, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. The Administration and the Legislature are still reviewing this decision and any statutory changes to such tests would be premature.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• The Department of Industrial Relations indicates that it would incur first-year costs of $2.2 million, and $2.1 million annually thereafter, to implement the provisions of the bill (Labor Enforcement and Compliance Fund).
• Total annual administration costs to the Employment Development Department would range between $2.5 million and $2.9 million.
• Additionally, this bill could result in unknown, potentially significant costs to the Medi-Cal program. Staff notes skilled nursing facilities and intermediate care facilities employ contractors to provide physical therapy, occupational therapy, mental health services, and dietary services. To the extent this bill makes it more challenging for specified facilities to continue employing these contractors, Medi-Cal beneficiaries who reside in skilled nursing facilities and/or intermediate care facilities would have longer stays in institutional settings instead of returning to the community. In addition, if these independent contractors, or new employees qualify as an independent contractor, types of claims could shift significantly, either to reflect higher-cost of care or, potentially, lower preventative utilization in the short-term but costly services in the out-years.
• The Franchise Tax Board (FTB) indicates that this bill would likely result in some workers who are currently treated as independent contractors being reclassified as employees. This reclassification would shift responsibility for a number of business related expenses from workers to the businesses. A reduction of qualified business expenses will likely increase the tax liability of workers, while the increase in expenses will decrease the tax liability of many businesses. The net effect of these changes would depend on the marginal tax rates of the businesses and workers involved, and any adjustment that may take place in compensation levels or related business expenses, and is unknown, In addition, reclassified workers would receive W-2s reporting their wages to FTB. This would likely increase the level of compliance for these workers, thereby increasing tax revenues.

SUPPORT: (Verified 8/30/19)

California Labor Federation (co-source)

State Building and Construction Trades Council (co-source)

9 to 5

Amalgamated Transit Union

American Federation of State, County and Municipal Employees

Berkeley City Council

BlueGreen Alliance

California Alliance for Retired Americans

California Association of Health Underwriters

California Conference of Machinists

California Federation of Teachers

California Immigrant Policy Center

California Nevada Conference of Operating Engineers

California Nurses Association

California Partnership for Working Families

California Professional Firefighters

California Rural Legal Assistance Foundation

California School Employees Association

Center on Policy Initiatives, San Diego

Central Coast Alliance United for a Sustainable Economy

Communication Workers of America, District 9

Direct Selling Association

East Bay Alliance for a Sustainable Economy

Employees Rights Center

Engineers and Scientists of California, IFPTE, Local 20

Greater California Livery Association

Independent Insurance Agents and Brokers of California

Labor and Employment Committee of National Lawyers Guild

Legal Aid at Work

Los Angeles Alliance for a New Economy

National Association of Insurance and Financial Advisors of California

National Domestic Workers Alliance

National Employment Law Project

National Union of Healthcare Workers

Orange County Communities Organized for Responsible Development

Professional and Technical Engineers, IFPTE, Local 21

Professional Beauty Federation of California

SEIU CA

SEIU Local 1000

Shaklee Corporation

Sierra Club California

Southern California Coalition for Occupational Safety and Health

Teamsters Public Affairs Council

The Greenlining Institute

Union of Concerned Scientists

UNITE HERE

United Auto Workers, Local 2865

United Auto Workers, Local 5810

United Domestic Workers, AFSCME Local 3930

United Farm Workers

United Food and Commercial Workers Western States Council

University Professional and Technical Employees, CWA Local 9119

Warehouse Worker Resource Center, Inland Empire

Western Center on Law and Poverty

Western States Council of Sheet Metal, Air, Rail and Transportation

Worksafe

OPPOSITION: (Verified 8/30/19)

American Electrology Association

American Society of Travel Advisors

Anthony Hopkins Investigations

Associated Bodywork and Massage Professionals

California Aesthetic Alliance

California Association of Licensed Investigators

California Association of Winegrape Growers

California League of Food Processors

California Physical Therapy Association

California Society for Respiratory Care

California Trucking Association

City of Glendora

Coalition of DMV Motor Carrier Permit Holders

El Dorado County Joint Chambers Commission

Electrologists’ Association of California

Electronic Transactions Association

Elk Grove Chamber of Commerce

Folsom Chamber of Commerce

Forest Landowners of California

Hayward Chamber of Commerce

Insights Association

J & B Water Trucking

Lavell Water Truck Service LLC

National Federation of Independent Business

Pacific Seafood

Rancho Cordova Chamber of Commerce

Roseville Area Chamber of Commerce

Santoro Transportation Inc.

Southern California Contractors Association

TechNet

147 individuals

ARGUMENTS IN SUPPORT: State Building and Construction Trades Council, writing in support, argues the following:

Last April, the California Supreme Court by a unanimous ruling in Dynamex Operations v. Supreme Court established a stronger protection for workers by making it more difficult to misclassify them as independent contractors. Workers classified as employees have access to the Labor Code's economic security protections such as minimum wage, unemployment insurance benefits, workers’ compensation, and a jobsite free from discrimination and harassment.

The Supreme Court's Dynamex decision specifically mentions that wage and hour laws are "clearly intended for the benefit of those law-abiding businesses that comply with the obligations imposed by the wage orders, ensuring that responsible companies are not hurt by unfair competition from competitor businesses that utilize substandard employment practices." There is no doubt that all employers (old, new, large, mid-size or small) that follow the state's labor laws are severely disadvantaged when their competitors misclassify employees as independent contractors.

Construction has two sides, one that promotes rewarding careers with fair wages and benefits and another that is heavily burdened by the underground economy which depresses wages, denies basic benefits, undercuts good employers, neglects training, and incentivizes unsafe working conditions. Regrettably, construction employers routinely misclassify workers as independent contractors to save money, increase profits and to benefit from an unfair competitive advantage over contractors with employees.

Most recently, the State of California brought forward the largest wage-theft case against any employer citing a framing and drywall subcontractor for cheating over 1,000 workers of the minimum wage, overtime and rest breaks on construction projects throughout the Los Angeles region. The state ordered that over $11.94 million in back wages and penalties for violations between 2014-2017 was owed by RDV Construction to its employees.

In another case brought by the state's labor commissioner, Calcrete Construction was sued separately for $6.3 million for cheating 249 construction workers out of their properly owed wages on one of the same projects involving RDV Construction. The Division of Labor Standards and Enforcement (DLSE) also found Calcrete Construction guilty of misclassifying 175 construction workers as independent contractors. In fact, these workers were threatened with termination of employment if they resisted signing contracts that falsely stated their independent contractor status.

According to a recent study by the Economic Roundtable titled, "Sinking Underground-The Growing Informal Economy in CA Construction," misclassified construction workers earn $.64 cents of every dollar a formal employee earns. In addition, the Employment Development Department's misclassification audits from 2005-2007 recovered $111,956,556 in pay roll taxes, $18,537,894 in labor citations and $40,348,667 in employment tax fraud. Lastly, DLSE estimates that misclassification costs the state over $7 billion annually.

We strongly support AB 5 because it:

• Reinforces Labor Code protections for misclassified workers by codifying the Dynamex case (or ABC test) into the Labor Code.

• Assists the Labor Agency/DLSE's efforts to fight the underground economy and hold law breaking contractors accountable.

• Restores tax revenue for unemployment insurance, disability insurance, and employer contributions to the workers compensation system by preventing misclassification.

• Protects law-abiding contractors, including signatory contractors, from being at a competitive disadvantage.

There has not been a moment in recent history granting the Legislature with the ability to protect the most disadvantaged workers and address income inequality which continues to cause extreme poverty and suffering while businesses, corporations and Wall Street score record breaking profits. We believe AB 5 provides this opportunity as it will significantly improve the working conditions for those that are currently misclassified and suffering from wage-theft and the other negative consequences of being denied the protections under the state's labor code.

ARGUMENTS IN OPPOSITION: The National Federation of Independent Businesses (NFIB), writing in opposition to AB 5, argues the following:

As you know, prior to Dynamex California courts and state agencies had long applied what is known as the Borello test for determining whether a worker was an independent contractor for labor and employment purposes. The Borello test was a multi-factor approach which looked primarily at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service, along with eight other “secondary” factors. In Dynamex, the California Supreme Court decided to abruptly replace the Borello test in April of 2018.

Dynamex established a new “ABC” test, which provides that a worker must be treated as an employee unless the hiring entity can prove that the worker is: (A) free from control; (B) providing services unrelated to the hiring entity’s business; and (C) holding him or herself out as an independent business. This rigid formula prevents entrepreneurs from working as an independent contractor if they are providing services integral to another company’s business, regardless of what steps they have taken to establish themselves as a separate, independent business.

Fortunately, many policy leaders including yourself have acknowledged this new “ABC” test under Dynamex is unworkable for every single business in a state and economy as diverse as California’s. Unfortunately, the amendment process that has followed the introduction of AB 5 has left too many small businesses behind by narrowly carving out specific industries, rather than seeking to craft an exemption based on the nature of the contractual relationship between two entities. In a recent direct balloting of our California small business membership, 78% told us clearly that they wish to see a different approach, one that exempts two established, independent businesses from the “ABC” test, rather than picking and choosing industries.

Broad exemption from “ABC” test between two verifiably independent businesses:

NFIB small business members feel strongly that if, for example, a service provider has gone through the process of incorporating as an LLC or S-Corp, that business operator should be presumed exempt from the “ABC” test so that he or she may freely provide their services to other companies. Fundamentally, if two contracting entities can verify they operate freely and independently of one another, they should be held to the longstanding multi-factor test under Borello. Also known as a “business-to-business” exemption, this broad amendment would address the fundamental encumbrance of the “ABC” test, without picking winners and losers by carving out specific industries.

Eliminate unfair retroactive application of “ABC” test prior to April of 2018:

The sweeping action taken by the California State Supreme Court with Dynamex undoubtedly rewrote decades of California law by supplanting what was known as the Borello test with an unprecedented “ABC” test, never seen before in statue or regulation. In May of 2019, the U.S. Court of Appeals for the Ninth Circuit ruled that this unprecedented test could be applied retroactively, even when employers had no possible way of knowing about the “ABC” test. While Borello was certainly imperfect, NFIB small business members feel strongly it is unfair to punish employers for following the law of the land at the time, which was Borello for nearly three decades.

Independent contractor relationships provide millions of small business owners and entrepreneurs the opportunity to pursue their dreams, yet the rigid “ABC” test established by Dynamex and the threat of litigation presented by retroactive application jeopardize these opportunities. NFIB small business members respectfully urge the adoption of the two amendments described above to AB 5 to significantly alleviate these concerns.

ASSEMBLY FLOOR: 59-15, 5/29/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooper, Daly, Diep, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Dahle, Fong, Gallagher, Gray, Kiley, Lackey, Melendez, Obernolte, Patterson, Voepel, Waldron

NO VOTE RECORDED: Cooley, Cunningham, Flora, Eduardo Garcia, Mathis, Mayes

Prepared by: Gideon L. Baum / L., P.E. & R. / (916) 651-1556

9/3/19 11:19:53

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 5 (Gonzalez) - Worker status: employees and independent contractors

Bill Summary:

AB 5 would (1) codify the recent Dynamex decision, requiring that employers prove that their workers can meet a 3 part (ABC) test in order to be lawfully classified as independent contractors, and (2) expand the scope of Dynamex to include unemployment insurance and other labor law protections.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 30, 2019

Fiscal Impact:

• The Department of Industrial Relations (DIR) indicates that it would incur first-year costs of $2.2 million, and $2.1 million annually thereafter, to implement the provisions of the bill (Labor Enforcement and Compliance Fund, see Staff Comments).
• Total annual administration costs to the Employment Development Department (EDD) would range between $2.5 million and $2.9 million.
• Additionally, the bill could result in unknown, potentially significant costs to the Medi-Cal program. Staff notes skilled nursing facilities and intermediate care facilities employ contractors to provide physical therapy, occupational therapy, mental health services, and dietary services. To the extent the bill makes it more challenging for specified facilities to continue employing these contractors, Medi-Cal beneficiaries who reside in skilled nursing facilities and/or intermediate care facilities would have longer stays in institutional settings instead of returning to the community. In addition, if these independent contractors, or new employees qualify as an independent contractor, types of claims could shift significantly, either to reflect higher-cost of care or, potentially, lower preventative utilization in the short-term but costly services in the out-years.
• The Franchise Tax Board (FTB) indicates that the bill would likely result in some workers who are currently treated as independent contractors being reclassified as employees. This reclassification would shift responsibility for a number of business related expenses from workers to the businesses. A reduction of qualified business expenses will likely increase the tax liability of workers, while the increase in expenses will decrease the tax liability of many businesses. The net effect of these changes would depend on the marginal tax rates of the businesses and workers involved, and any adjustment that may take place in compensation levels or related business expenses, and is unknown, In addition, reclassified workers would receive W-2s reporting their wages to FTB. This would likely increase the level of compliance for these workers, thereby increasing tax revenues.

Author Amendments:

(1) Clarify the operation of the ABC test and reorganize existing dispensations from the Dynamex employment test, (2) include psychologists, travel agents, enrolled agents, commercial fisherman, and others under the Borello test, (3) include freelance journalists and photographers under the professional exemption in the bill, (4) address trucking in the construction trades and clarify the use of trucks by owner-operator truck drivers who are classified as employees, and (5) clarify the operation of workers’ compensation under the bill.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 5 (Gonzalez) - Worker status: employees and independent contractors

Bill Summary:

AB 5 would (1) codify the recent Dynamex decision, requiring that employers prove that their workers can meet a 3 part (ABC) test in order to be lawfully classified as independent contractors, and (2) expand the scope of Dynamex to include unemployment insurance and other labor law protections.

Fiscal Impact:

• The Department of Industrial Relations (DIR) indicates that it would incur first-year costs of $2.2 million, and $2.1 million annually thereafter, to implement the provisions of the bill (Labor Enforcement and Compliance Fund, see Staff Comments).
• Total annual administration costs to the Employment Development Department (EDD) would range between $2.5 million and $2.9 million (see Staff Comments).
• Additionally, the bill could result in unknown, potentially significant costs to the Medi-Cal program. Staff notes skilled nursing facilities and intermediate care facilities employ contractors to provide physical therapy, occupational therapy, mental health services, and dietary services. To the extent the bill makes it more challenging for specified facilities to continue employing these contractors, Medi-Cal beneficiaries who reside in skilled nursing facilities and/or intermediate care facilities would have longer stays in institutional settings instead of returning to the community. In addition, if these independent contractors, or new employees qualify as an independent contractor, types of claims could shift significantly, either to reflect higher-cost of care or, potentially, lower preventative utilization in the short-term but costly services in the out-years.

Background:

New business models and communications technologies have led many workers to supply their labor outside of the traditional employment relationship in recent years. An incentive exists for employers to misclassify their employees as independent contractors and illegally avoid paying the cost of benefits. Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. Thus, the misclassification of employees represents a cost-shift from an employer to the employee and state taxpayers. Empirical evidence suggests the use of independent contractors has become more pervasive; one study concluded that the number of workers classified as independent contractors rose 30 percent during the years 2005 to 2015.

With respect to classification of employees, the primary court precedent is less than precise on who was an independent contractor and who was not. Specifically, in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341, the California Supreme Court created an 11 point “economic realities” test on whether someone could lawfully be considered an independent contractor. Outside of particularly clear-cut instances, this made determining who was or was not an independent contractor complicated, expensive, and prone to litigation, resulting in considerable frustration for both worker and employer stakeholders.

In early 2019, the California Supreme Court revisited the independent contractor issue in Dynamex Operations West v. Superior Court (2018), and concluded that certain package delivery drivers were misclassified as independent contractors rather than employees under a California wage order specific to the transportation industry. Thus, under Dynamex, the test for whether a worker is an independent contractor or an employee is a greatly simplified to a three-prong test: (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact, (B) the worker performs work that is outside the usual course of the hiring entity’s business, and (C) 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.

Proposed Law:

This bill would codify and expand the recent decision in Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903. Specifically, among other things, this bill would do the following:

• Provide that, except where a statutory exemption from employment status or an exemption from a particular obligation related to employment applies or where a statutory grant of employment status or a particular right related to employment applies, for purposes of the provisions of this code and the Unemployment Insurance Code and the IWC’s wage orders, where a definition for employee is not provided a person providing labor or services for remuneration must be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:
  • The person 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 person performs work that is outside the usual course of the hiring entity’s business.
  • The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
• Provide that, for the following occupations, the applicable test for determining if an individual is an employee or an independent contractor is the predecessor test to Dynamex developed by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 or relevant statute: (1) licensed insurance brokers, (2) licensed physicians and surgeons, (3) registered securities broker-dealers, investment advisors, or their agents and advisors, (4) a direct salesperson, provided that the salesperson’s compensation is based on actual sales, rather than wholesale purchases or referrals, (5) a real estate licensee, as provided under existing licensure provisions in the Business and Professions Code, and (6) a repossession agent.
• Provide that relationships between a business entity and an individual providing work under contract is under the Borello test if all of the following criteria are satisfied:
  • The service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • The service provider is providing services to the contracting business rather than to customers of the contracting business.
  • The contract with the service provider is in writing.
  • If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
  • The service provider maintains a business location that is separate from the business or work location of the contracting business.
  • The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  • The service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
  • The service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • The service provider has no other financial relationships with the contracting business.
  • The service provider can negotiate its own rates, provided that the rate is equal to or greater than two times the minimum wage for hours worked.
  • The service provider can set its own hours and location of work.
  • The service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Section 7000 and following of the Business and Professions Code.
• Provide that, for a worker who provides hairstyling and barbering services, an electrologist, an esthetician, or a worker providing natural hair braiding, the applicable test for determining if an individual is an employee or an independent contractor is Borello if the worker is free from direction or control of the contracting entity. This includes, but is not limited to, the following:
  • The worker sets their own rates for services performed, provided the rate is equal to or greater than two times the minimum wages for hours worked and is paid directly by their clients.
  • Sets their own hours of work and has sole discretion to decide which clients from who they will provide services.
  • Has their own book of business or clients and schedules their own appointments.
  • Uses own funds to purchase requisite supplies used to provide services.
  • Maintains their own business license.
• Provides that the Borello employment test governs professional contracts if the contracting entity can demonstrate all of the following:
  • The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity.
  • If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
  • The individual has the ability to use their own employees in the completion of the work, where reasonable, and has the authority to hire and fire other persons who assist in providing the services. Nothing in this section requires an individual to hire an employee.
  • The individual has the ability to engage in other contracts for services than with the hiring entity.
  • Both the individual and the hiring entity have the ability to negotiate compensation for the services performed.
  • Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours.
  • For services that do not reasonably have to be performed at a specific location, the individual can determine where to perform the services under the contract.
  • The individual is customarily engaged in the same type of work performed under the contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
  • The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
• Provide that an individual contracting for professional services, as defined, can do so as a sole proprietor or other business entity.
• Provide that the Borello test governs the relationship between a contractor and an individual permforming work pursuant to a subcontract in the construction industry if all of the following criteria are satisfied:
  • The individual is free from the control and direction of the contractor in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • The subcontract is in writing.
  • The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
  • If the work is performed in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
  • The subcontractor maintains a business location that is separate from the business or work location of the contractor.
  • The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
  • The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, performance bonds, or warranties relating to the labor or services being provided.
  • The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.

Related Legislation:

AB 2496 (Gonzalez Fletcher, 2018) would have created a rebuttable presumption that a worker in the janitorial field is an employee, and therefore is due the same protections and privileges as other employees. The bill was vetoed by the Governor.

Staff Comments:

DIR’s Division of Labor Standards Enforcement (DLSE) anticipates that this bill, as currently drafted, would pose various implementation issues. These include (1) addressing legal challenges concerning retrospective application of the statute, (2) potential ambiguity regarding the various exceptions in the bill, and (3) the extent to which other alternative employment tests are nonetheless applicable after the bill’s enactment. DLSE expects both its Wage Claims Adjudication Unit (WCA) and Bureau of Field Enforcement (BOFE) to be impacted; however, the precise increase in workload cannot be determined, as it is not possible to predict how many new cases would result from the bill’s passage. DIR notes that some of those cases likely would have been filed even absent enactment of AB 5, since worker misclassification is a pervasive problem absent the bill, pre-dating AB 5, with workers filing claims under the current Borello standard.

Any increase in workload due to new claims, based on factors such as increased clarity regarding the application of the ABC test to the Labor Code, would likely be offset by the ability to use a simpler test instead of the more complicated Borello test. However, DLSE anticipates the need for additional attorneys to help deputies and hearing officers to analyze, understand and implement the various aspects of the legislation, such as the carve-outs which include numerous threshold criteria before the Borello test is even triggered. In addition, DLSE would likely be challenged in its administrative decisions, resulting in additional litigation in court that would require more staff.

DIR anticipates that its Division of Workers' Compensation (DWC) also would experience an increase in workload. The expansion of the application of the ABC test to workers’ compensation could result in an influx of new claims by workers if businesses affirmatively classify or reclassify their workers as employees, thereby making them eligible for workers’ compensation benefits. However, here too, it is impossible to project with any certainty the number of new claims that would result, or the level of severity of any injuries that would be involved. If the number of claims increases 10 to 20 percent, this would result in substantial costs in the workers' compensation system, in order to staff DWC to adjudicate the claims, and accommodate the increased workload that would result.

In summation, DIR indicates that the bill’s total fiscal impact would be $2.2 million in the first year and $2.1 million ongoing. If the bill were to expand the ABC test to clearly cover workers' compensation, it could result in substantially increased additional costs, extending in the millions of dollars annually, depending on the actual number of new claims.

EDD notes that the bill would have several fiscal impacts as well. First, the current version of the bill would require it to adopt the ABC test when determining if an individual is an employee or independent contractor unless there is a statutory exemption. This represents a change from how it has conducted employment status determinations previously (which were based on common law). Second, the bill would require it train tax representatives who conduct employer audits on how to administer the ABC test when making employment determinations. Third, the department’s Tax Branch would need to update all appropriate guidance, forms, policies, notices, and procedures in order to convert from using the common law test to the new ABC test. Fourth, EDD would conduct outreach to employers through seminars, training materials, and special events over the next few years. Fifth, Tax Branch staff would review any relevant employer notices housed within EDD’s Accounting and Compliance Enterprise System to determine if those notices required updates to comply with the ABC test. Sixth, the department would also provide a one-time direct mailing in 2019-20 to California’s 1.4 million employers informing them of the new ABC test.

Finally, EDD estimates it would receive approximately 20 percent more phone calls and other employer correspondence as a result of the bill. The department expects employers would appeal determinations, request hearings, and dispute benefit claims related to the ABC test. Consequently, it would be required to hire or redirect staff to address this workload. The new employment test may also spur litigation from employers who question its validity.

The total implementation costs for EDD would be $2.5 million in 2019-20, $2.9 million in 2020-21, and $2.5 million in 2021-22. These estimates exclude any potential information technology needs resulting from this workload. While the initial transition to using the ABC test would require additional staffing resources, EDD could experience efficiencies from the bill in future years if the ABC test proves to be a more streamlined process for determining employment status. Applying the ABC test could also be less time consuming for tax representatives conducting these audits since the presumption of employment could make it easier for EDD to classify worker as employees.

-- END --

SENATE COMMITTEE ON LABOR, PUBLIC EMPLOYMENT AND RETIREMENT

Senator Jerry Hill, Chair

2019 - 2020 Regular

Bill No: AB 5 Hearing Date: July 10, 2019

SUBJECT: Worker status: employees and independent contractors

KEY ISSUE

Should the Legislature codify the recent Dynamex decision, requiring that employers prove that their workers can meet a 3 part (ABC) test in order to be lawfully classified as independent contractors?

Should the Legislature expand the scope of Dynamex to include unemployment insurance and other labor law protections?

ANALYSIS

Existing law:

1. Establishes a comprehensive set of protections for employees, including a time-sure minimum wage, meal and rest periods, workers’ compensation coverage in the event of an industrial injury, sick leave, disability insurance (DI) in the event of a non-industrial disability, paid family leave, and unemployment insurance (UI).
   (Labor Code §§201, 226.7, 246, 512, 1182.12, & 3600 and UI Code §§1251 & 2601)
2. Creates the Industrial Welfare Commission (IWC), which promulgates industry-specific wage orders that set the wages, hours, and working conditions of employees. The IWC wage orders have the force of regulation and are enforced by the Division of Labor Standards Enforcement (DLSE).
   (Labor Code §§70, 1173, 1177, 1195 & 1197)
3. Provides that there is a rebuttable presumption that a worker performing services for which a contractor’s license is required, or who is performing such services for a person who is required to obtain such a license, is an employee rather than an independent contractor. (Labor Code §2750.5)
4. In order to rebut the presumption described above, an employer must prove the following:
5. That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor;
6. That the individual is customarily engaged in an independently established business.
7. That the individual’s independent contractor status is bona fide and not a subterfuge to avoid employee status. A bona fide independent contractor status is evidenced by the presence of cumulative factors, which includes substantial investment other than personal services in the business, holding out to be in business for oneself, and bargaining for a contract to complete a specific project for compensation by project rather than by time.

This test, also known as the ABC test, has been California law since 1979.

(Labor Code §2750.5)

1. Requires that an individual holds a valid contractor’s license as a condition of having independent contractor status. (Labor Code §2750.5)
2. Requires, for the purposes of IWC wage orders, that the specific work conditions of a worker must conform with the following three circumstances to be considered an independent contractor:

(A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) The worker performs work that is outside the usual course of the hiring entity’s business; and

(C) 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.

(Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903)

This bill codifies and expands the recent decision in Dynamex Operations West v. Superior Court (2018) 4 Cal. 5th 903. Specifically, this bill:

1. Provides that, for the purposes of the Labor Code and Unemployment Insurance Code and the IWC’s wage orders, where a definition for employee is not provided a person providing labor or services for remuneration must be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:
2. The person 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.
3. The person performs work that is outside the usual course of the hiring entity’s business.
4. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
5. Provides that, for the following occupations, the applicable test for determining if an individual is an employee or an independent contractor is the predecessor test to Dynamex developed by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 or relevant statute:
6. Licensed insurance brokers.
7. Licensed physicians and surgeons.
8. Registered securities broker-dealers, investment advisors, or their agents and advisors.
9. A direct salesperson, provided that the salesperson’s compensation is based on actual sales, rather than wholesale purchases or referrals.
10. A real estate licensee, as provided under existing licensure provisions in the Business and Professions Code.
11. Provides that, for a worker who provides hairstyling and barbering services, the applicable test for determining if an individual is an employee or an independent contractor is Borello if the worker is free from direction or control of the contracting entity. This includes, but is not limited to, the following:
12. The worker has a booth rental permit.
13. The worker sets their own rates for services performed.
14. Has their own book of business or clients.
15. Provides that the Borello employment test governs professional contracts if the contracting entity can demonstrate all of the following:
16. The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity.
17. If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
18. The individual has the ability to use their own employees in the completion of the work, where reasonable, and has the authority to hire and fire other persons who assist in providing the services. Nothing in this section requires an individual to hire an employee.
19. The individual has the ability to engage in other contracts for services than with the hiring entity.
20. Both the individual and the hiring entity have the ability to negotiate compensation for the services performed.
21. Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours.
22. For services that do not reasonably have to be performed at a specific location, the individual can determine where to perform the services under the contract.
23. The individual is customarily engaged in the same type of work performed under the contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
24. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
25. Provides that an individual contracting for professional services can do so as a sole proprietor or other business entity.
26. Defines “professional services” as either:
27. Requiring an active license from the State of California and involve the practice of one of the following recognized professions: law, dentistry, architecture, engineering, or accounting.
28. Requiring possession of an advanced degree that customarily involves a prolonged course of specialized intellectual instruction and study in the field of marketing or the administration of human resources from an accredited university, college, or professional school, as distinguished from a general academic education.
29. Makes findings and declarations on Dynamex, the negative consequences of misclassification, and states that this bill is not a change in the law with regard to violations of the Labor Code relating to wage orders of the Industrial Welfare Commission.

COMMENTS

1. Independent Contractors, Borello, and Dynamex:

The cornerstone of Labor Law is the employer-employee relationship. Specifically, the employer-employee relationship is a social contract: the employer provides wages and benefits (some legally required) to the employee, in return for the employee’s labor, time, and intellectual and/or physical product. The legal roots of this relationship go back to Medieval England, yet are durable enough to shape our current world.

In the past 30 years, this relationship has been put under pressure and strain due to the increasing utilization of independent contractors. For employers who lawfully utilize independent contractors, it allows a business to utilize the services of a skilled individual for specific tasks. The employer trades control over the working conditions for being released from many of the primary obligations of being an employer, including paying overtime, remitting payroll taxes, securing workers’ compensation coverage, and ensuring a healthy and safe work environment.

This creates a tremendous incentive for employers to misclassify their employees and illegally avoid paying the cost of benefits. This amounts to a cost-shift from an employer to the employee specifically and, in the case of particularly egregious examples, the people of California generally in the form of increased safety net spending. And it may be a growing issue: according to a 2016 study conducted by Alan Krueger, the number of workers classified as independent contractors rose 30% from 2005 to 2015.

In short, misclassification impacts all Californians, not just the Californians who are misclassified, and may be getting worse, rather than better.

This challenge was further exacerbated because the primary court precedent was less than precise on who was and who was not an independent contractor. Specifically, in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341, the California Supreme Court created an 11 point “economic realities” test on whether someone could lawfully be considered an independent contractor. Outside of particularly clear-cut or egregious situations, this made determining who was or was not an independent contractor complicated, expensive, and prone to litigation. This created considerable frustration for both worker and employer stakeholders.

However, this period of considerable confusion appears to be drawing to a close. Earlier this year, the California Supreme Court revisited the independent contractor issue in Dynamex Operations West v. Superior Court (2018). Under Dynamex, the test for whether a worker is an independent contractor or an employee is a greatly simplified to a three-prong test:

(A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) The worker performs work that is outside the usual course of the hiring entity’s business; and

(C) 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.

While a similar ABC Test has been in place for the construction industry for almost 40 years (and predates the Borello test by a decade), the Dynamex decision has created significant controversy in the employer community. AB 5 codifies the Dynamex decision, while also expanding its scope to areas of Labor Law beyond the IWC wage orders. Additionally, AB 5 provides narrow exemptions from Dynamex for specific industries, placing them instead under the broader Borello test.

2. AB 5 and Uncovering the Original Dynamex in Dynamex:

In seminal court decisions like Dynamex, it is sometimes easy to lose sight of the facts that led to the decision and go straight to the decision’s core holding: the ABC test. This, however, is a mistake. By skipping over the facts of the case, the workers who struggled against the injustice of misclassification are relegated to a legal footnote and obscures why AB 5 is before the Committee today.

As highlighted in the decision, Dynamex is a national on-demand delivery service with several large business clients – including Office Depot and Home Depot. Prior to 2004, all of their delivery drivers were employees. However, starting in 2004, they abruptly re-classified their drivers as independent contractors solely to save money. The drivers had no ability to set rates, were required to use their own vehicles and pay for all transportation expenses, and were expected to pay for Dynamex uniforms with their own money. Moreover, work was assigned solely at the discretion of the Dynamex dispatchers.^[1]

In 2005, an aggrieved worker, who alleged employee misclassification, sued Dynamex. In 2011, the Court certified class status. Finally, in 2018, the Court ruled in Dynamex that these drivers were misclassified – a 13 year quest for justice. In codifying the ABC Test discussed above, AB 5 ensures that this injustice is not repeated.

3. Building a Mystery– Dynamex and Prong B (Usual Course of Business):

Despite the clear direction of the Supreme Court’s “ABC Test” in Dynamex, the ruling did leave several very important questions. For example, when discussing the “usual course of business” in Prong B of the Dynamex test, the Court says the following:

“… one principal objective of the suffer or permit to work standard is to bring within the “employee” category all individuals who can reasonably be viewed as working “in the [hiring entity’s] business” (citation ommitted), that is, all individuals who are reasonably viewed as providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor….

Thus, on the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. (citation omitted) On the other hand, when a clothing manufacturing company hires work at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company (citation omitted), or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes (citation omitted), the workers are part of the hiring entity’s usual business operation…. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.

Treating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need and want the fundamental protections afforded by the wage order do not lose those protections. If the wage order’s obligations could be avoided for workers who provide services in a role comparable to employees but who are willing to forgo the wage order’s protections, other workers who provide similar services and are intended to be protected under the suffer or permit to work standard would frequently find themselves displaced by those willing to decline such coverage.”

(Emphasis added)

There are several pieces worth unpacking here. First, the Court is saying that there is a thing known as a traditional (or genuine) independent contractor. The Court uses the example of a plumber or electrician, which is somewhat odd noting that both are commonly viewed as independent contractors because of statutory provisions: specifically, the Labor Code provisions discussed above in Labor Code Section 2750.5. Without such a statutory protection, such a common understanding may not be so common.

In another area of the decision, however, the Court does list several other vocations as “unquestionably” independent contractors: “independent plumbers, electricians, architects, sole practitioner attorneys, and the like — who provide only occasional services unrelated to a company’s primary line of business and who have traditionally been viewed as working in their own independent business.” (Dynamex, S222732 at 54) This is likely what the Court means by being outside of the retail store’s usual course of business.

Second, in looking at the examples of the seamstress and cake decorator, the Court appears to focus on the centrality of the task to the employer’s business model: a cake decorator to a cake business and a seamstress to a dress-making company. While this seems straightforward, it is likely that both of these examples would have been prohibited under Borello. For example, in the case of the cake decorator, the workers were prohibited from leaving the job site prior to the work being completed and therefore had to routinely work 50-60 hours per week. That level of control will trigger an employer-employee relationship under the Borello test.

Third, the Court discusses the need to protect workers to prevent a race to the bottom. Here, the Court takes a sharp turn, adopting a strong normative stance in an arena that traditionally had been heavy on specific factor-based analysis. It appears the Court is arguing that, without protections for workers who are utilized by employers for the employer’s usual course of business, then the risk of a race to the bottom is simply too great and will leave certain classes of workers in an unacceptably vulnerable position.

So, in broad brushstrokes, a few things come into focus:

1. There is such a thing as a traditional independent contractor;
2. That person is someone who works occasionally for an employer, but not in their client’s normal course of business;
3. That a client’s normal course of business can be cleanly distinguished from the client’s non-normal course of business; and
4. The independent contractor is in some way, shape, or form less vulnerable (or not vulnerable at all) in a way that an employee is uniquely or particularly vulnerable.

To an outside observer, this would seem simple and straightforward.

4. Dynamex and the False Promise of Simplicity:

Unfortunately, bright line tests of who is an employee are rarely so bright when subjected to the rigor of reality. For example:

1. What makes a traditional independent contractor an independent contractor? Is it passage of time and tradition? If so, the trucking industry was deregulated in 1980, 1 year after the codification of plumbers and electricians as independent contractors. Are truckers “traditional” independent contractors?
2. What is occasional? At what juncture does a working relationship move from occasionally to regularly? Is there some magical point in time where that extra phone call turns a contractor into an employee?
3. What is a client’s normal course of business? And who decides? The Court uses retail as an example, and for large retailers like Target it is unquestionable that cashiers, stockers, and salespeople would qualify as employees (as they would under Borello due to control). What about small retailers where individuals who manufacture the goods? Without goods, there is no business – does that make the individual artisan an employee? Is there a scenario where they are not an employee? If so, what?
4. It is unquestionable that a janitor is more vulnerable than an attorney. This is reflected both in law and in conventional wisdom. But why? Why is an attorney on the same level of vulnerability as an electrician, but not a journalist?

There is no intellectual Northwest Passage to developing rules for who is and is not an employee. Even with an ABC test, the test will fade at the margins. There needs to be an intellectual core, a fundamental polestar on who is an independent contractor and what makes them independent, rather than a case-by-case analysis on each and every occupation.

5. Assembly Bill 5 and the Search for Clarity:

Therefore, AB 5 faces a herculean task: cutting through 30 years of deferred statutory leadership, codifying a case that is concrete only in the abstract, and identifying and addressing the areas where the Dynamex test inappropriately fades in the margins.

It is in the last category that there has been the most attention: the messy tweeners where the Dynamex decision simply is not clear enough to determine who is an employee. If the proponents draft special occupational or industrial rules that are too broad, then AB 5 loses its protective power for workers. If the special rules are drafted too narrowly, then AB 5 risks disrupting longstanding independent contractor relationships, including the elusive “traditional” independent contractors discussed in the original Dynamex decision.

To thread this needle, AB 5 has focused on occupation-by-occupation rules, placing specific occupations (that in some cases need to meet explicit requirements) under the Borello test. Essentially, the bill is saying, “if your workers were independent contractors before Dynamex, then they can continue to be independent contractors under Assembly Bill 5”. That said, by retaining the Borello test, these occupations remain in the messy muddle of a failed employment test that met the needs of neither employers nor workers. Should Assembly Bill 5 become law, the Legislature will need to revisit the remnants of Borello in the future.

Beyond the list of specified occupations, the bill in print before the Committee does not have a general guideline for when a company’s “usual course of business” is unclear or prone to misinterpretation. To put it differently, the Court in Dynamex talks of “traditional” independent contractors, gives a partial list, and then talks of “others”. Who are the others? How will we know them when we see them?

For example, suppose a business is seeking bids to conduct an advertisement campaign. An ad company that wants the contract for the campaign contracts a copy editor who is particularly experienced with the client’s industry. The business loves the campaign concepts, and the ad company wins the contract. As a part of the contract, the copy editor’s services are separately billed to the client (copy editor’s rates, plus a service markup).

First, can the ad company legally contract with the copy editor? Second, if the business is paying the contractor’s rates, is the business paying/receiving services directly from the contractor? Finally, do any of these questions change if the copy editor organizes her sole proprietorship as an S Corporation, and classifies herself as an employee of the S Corporation?

To codify Dynamex, it is necessary to also codify the intellectual matrix that the Court used to arrive at the Dynamex rule. Otherwise, AB 5 runs the risk of sinking into the same inertia of Borello (and the common law test before that).

6. Searching for the “Others” – Codifying the Intellectual Framework of Dynamex:

As discussed above, the Court in Dynamex links independent attorneys, architects, electricians, plumbers, “and others” as independent contractors. What is it that these folks have in common that makes these occupations “unquestionably” open to independent contractor status?

Market Strength:

Market strength is a vague concept, and that concept is not assisted by the reality that it can change. But it is somewhat helpfully highlighted by a hypothetical: if someone relayed a story of a group of misclassified attorneys, forced to take sub-minimum wage payments for legal services, that story will be met with skepticism. Why? There are a finite number of attorneys, and they average an annual mean salary of $171,550 in California or $82.48 per hour – nearly 7 times the State Minimum Wage.

Similarly, there are a finite number of electricians (about 16,000 fewer electricians than lawyers) and electricians make an hourly mean wage of $33.33 – about 2.8 times the State Minimum Wage. Similar to attorneys, electricians have strict educational and licensure requirements. Between the finite number of professionals and strict barriers to entry, attorneys and electricians are able to control their working conditions free from coercion and intimidation. Taken together, this places the hypothetical electrician in a different market stratum than the hypothetical janitor.

Logically, it follows that an independent electrician or attorney will make a comparable amount of money (AFTER taxes and expenses) to a similarly situated employee. An attorney who is a sole proprietor, for example, may be comfortable making $86,000 per year if she works 50% less than a comparable employee. On the other hand, an enforcement entity would be well within reason to question a work arrangement where an attorney worked 80 hours per week and only earned $70,000, irrespective of that amount’s relation to the State Minimum Wage.

Similarly, in industries where there are low barriers to entry and there are significant numbers of employees, claims of independent contract status should be met with heightened scrutiny by enforcement entities.

Rate Setting:

Similar to market strength, genuine independent contractors are able to set their own rates for their labor, without interference from another entity. Granted, the act of rate setting occurs in a larger economic context: an electrician who sets an equivalent hourly rate at $50 is more likely to build a successful business than an electrician setting an equivalent hourly rate at $500 due to market demand and competition with other electricians (independent or otherwise). Yet, the ability for a worker to set their own rates for their own labor is a sign of independence, and if a worker is not able to set their own rates, it is difficult to imagine a set of facts where that worker could ever be an independent contractor.

Therefore, if a company does not permit its “independent contractors” to set their own rates, or only permits rate setting in a narrow band, such claims of independent contractor status should be met with skepticism. Alternatively, if a company permits their independent contractors to charge their own rates, and then enforces payment of those rates through contracts with other companies or clients without deduction, then the likelihood that worker is an independent contract is higher than not.

Relationship between the Contractor and Client:

At its most elementary level, an independent contractor creates a contract with a client for a specific purpose. Therefore, an independent contractor and the client have a direct relationship, communicate directly to resolve any questions or concerns, and use the structure of the contract to resolve any disputes. Granted, just as attorneys or electricians will refer clients to their fellow associates, or as a client may find an attorney through a referral service, there may be an intermediary. And the intermediary may accrue a simple fee for the referral or advertisement.

For example, CA State Bar Association permits attorneys to pay referral fees, but requires (in part) that the referral fee is explicitly disclosed, the client has agreed to it, and that the referral fee is not “unconscionable”. In looking at whether a fee is unconscionable or not, the Bar Association looks at whether the fee is in proportion to the value of services performed.

Similarly, when looking at fees charged by brokers or intermediaries, ensuring that these intermediary’s fees are in proportion to the value provided to the contractor is incredibly important. Does intermediary ensure that the worker is paid in a timely manner and has the maximum amount of work requested? Does the intermediary improve payment times? Does the intermediary maximize rate setting and market position? Does the intermediary assist the worker in disputes? Does the intermediary improve contractor earnings compared to other contractors or employees?

If not, what is the function of the intermediary, beyond skirting employer responsibilities?

Technological Neutrality:

Finally, it is worth mentioning that, while there has been significant media discussion on disruption, digital applications, and the “gig economy”, this serves more to confuse than clarify. On one hand, if a client secures the services of a contractor through an intermediary, it is unclear how the People of California are well served if the law makes a distinction between the intermediary being contacted through the Yellow Pages or the internet. This is particularly true as the distinction becomes increasing academic: a phone can be used to call someone as well as access an internet application. The core question is if the intermediary is, to use the legal world as a model, deriving disproportionate benefits from the relationship. The rest is detail.

On the other hand, an internet application, no matter how clever, cannot turn lead to gold. Misclassification is misclassification. A company that utilizes the independent contractor model to undercut the employer-based model to cut costs and achieve profitability or scale is a company that misclassifies its workers. The historical reality of the capitalist marketplace and the State’s need to protect workers are not repealed by a clever branding initiative, “killer” application, or product placement in a Netflix special. Lead cannot be gold.

7. Dynamex and Retroactivity:

Shortly after the Dynamex ruling, some stakeholders questioned if the impact of the ruling was retroactive. Since then, the courts have applied the Dynamex ruling retroactively in wage and hour disputes, noting that the Supreme Court did not limit its ruling to prospective questions. As such, the issues in AB 5 are not simply prospective.

This is already having impacts on California businesses. One small business owner recently reached out to the Committee, noting that she hired a yoga instructor in 2015 for a photo shoot. It was a one-day shoot, and they paid the instructor’s agent $500. They had no further interaction with the yoga instructor.

Four years later, the small business is facing a Dynamex lawsuit for $72,000. The small business is currently facing bankruptcy, and is unclear how she found herself here, as she was following the law as of 2015, and was unaware that there was an issue until the lawsuit was filed.

While it is appropriate for the Court and the Legislature to require that companies that unlawfully misclassified their employees repay their employees for the wages that they stole, with penalties, we also need to ensure that blameless parties are not swept up in the push for justice. One potential place to start would be limiting retroactive penalties in cases where the worker’s contract was for less than 40 hours in total.

8. Proponent Arguments:

State Building and Construction Trades Council, writing in support, argues the following:

“Last April, the California Supreme Court by a unanimous ruling in Dynamex Operations v. Supreme Court established a stronger protection for workers by making it more difficult to misclassify them as independent contractors. Workers classified as employees have access to the Labor Code's economic security protections such as minimum wage, unemployment insurance benefits, workers’ compensation, and a jobsite free from discrimination and harassment.

The Supreme Court's Dynamex decision specifically mentions that wage and hour laws are "clearly intended for the benefit of those law-abiding businesses that comply with the obligations imposed by the wage orders, ensuring that responsible companies are not hurt by unfair competition from competitor businesses that utilize substandard employment practices." There is no doubt that all employers (old, new, large, mid-size or small) that follow the state's labor laws are severely disadvantaged when their competitors misclassify employees as independent contractors.

Construction has two sides, one that promotes rewarding careers with fair wages and benefits and another that is heavily burdened by the underground economy which depresses wages, denies basic benefits, undercuts good employers, neglects training, and incentivizes unsafe working conditions. Regrettably, construction employers routinely misclassify workers as independent contractors to save money, increase profits and to benefit from an unfair competitive advantage over contractors with employees.

Most recently, the State of California brought forward the largest wage-theft case against any employer citing a framing and drywall subcontractor for cheating over 1,000 workers of the minimum wage, overtime and rest breaks on construction projects throughout the Los Angeles region. The state ordered that over $11.94 million in back wages and penalties for violations between 2014-2017 was owed by RDV Construction to its employees.

In another case brought by the state's labor commissioner, Calcrete Construction was sued separately for $6.3 million for cheating 249 construction workers out of their properly owed wages on one of the same projects involving RDV Construction. The Division of Labor Standards and Enforcement (DLSE) also found Calcrete Construction guilty of misclassifying 175 construction workers as independent contractors. In fact, these workers were threatened with termination of employment if they resisted signing contracts that falsely stated their independent contractor status.

According to a recent study by the Economic Roundtable titled, "Sinking Underground-The Growing Informal Economy in CA Construction," misclassified construction workers earn $.64 cents of every dollar a formal employee earns. In addition, the Employment Development Department's misclassification audits from 2005-2007 recovered $111,956,556 in pay roll taxes, $18,537,894 in labor citations and $40,348,667 in employment tax fraud. Lastly, DLSE estimates that misclassification costs the state over $7 billion annually.

We strongly support AB 5 because it:

• Reinforces Labor Code protections for misclassified workers by codifying the Dynamex case (or ABC test) into the Labor Code.

• Assists the Labor Agency/DLSE's efforts to fight the underground economy and hold law breaking contractors accountable.

• Restores tax revenue for unemployment insurance, disability insurance, and employer contributions to the workers compensation system by preventing misclassification.

• Protects law-abiding contractors, including signatory contractors, from being at a competitive disadvantage.

There has not been a moment in recent history granting the Legislature with the ability to protect the most disadvantaged workers and address income inequality which continues to cause extreme poverty and suffering while businesses, corporations and Wall Street score record breaking profits. We believe AB 5 provides this opportunity as it will significantly improve the working conditions for those that are currently misclassified and suffering from wage-theft and the other negative consequences of being denied the protections under the state's labor code.”

9. Opponent Arguments:

The National Federation of Independent Businesses (NFIB), writing in opposition to AB 5, argues the following:

“As you know, prior to Dynamex California courts and state agencies had long applied what is known as the Borello test for determining whether a worker was an independent contractor for labor and employment purposes. The Borello test was a multi-factor approach which looked primarily at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service, along with eight other “secondary” factors. In Dynamex, the California Supreme Court decided to abruptly replace the Borello test in April of 2018.

Dynamex established a new “ABC” test, which provides that a worker must be treated as an employee unless the hiring entity can prove that the worker is: (A) free from control; (B) providing services unrelated to the hiring entity’s business; and (C) holding him or herself out as an independent business. This rigid formula prevents entrepreneurs from working as an independent contractor if they are providing services integral to another company’s business, regardless of what steps they have taken to establish themselves as a separate, independent business.

Fortunately, many policy leaders including yourself have acknowledged this new “ABC” test under Dynamex is unworkable for every single business in a state and economy as diverse as California’s. Unfortunately, the amendment process that has followed the introduction of AB 5 has left too many small businesses behind by narrowly carving out specific industries, rather than seeking to craft an exemption based on the nature of the contractual relationship between two entities. In a recent direct balloting of our California small business membership, 78% told us clearly that they wish to see a different approach, one that exempts two established, independent businesses from the “ABC” test, rather than picking and choosing industries.

Broad exemption from “ABC” test between two verifiably independent businesses:

NFIB small business members feel strongly that if, for example, a service provider has gone through the process of incorporating as an LLC or S-Corp, that business operator should be presumed exempt from the “ABC” test so that he or she may freely provide their services to other companies. Fundamentally, if two contracting entities can verify they operate freely and independently of one another, they should be held to the longstanding multi-factor test under Borello. Also known as a “business-to-business” exemption, this broad amendment would address the fundamental encumbrance of the “ABC” test, without picking winners and losers by carving out specific industries.

Eliminate unfair retroactive application of “ABC” test prior to April of 2018:

The sweeping action taken by the California State Supreme Court with Dynamex undoubtedly rewrote decades of California law by supplanting what was known as the Borello test with an unprecedented “ABC” test, never seen before in statue or regulation. In May of 2019, the U.S. Court of Appeals for the Ninth Circuit ruled that this unprecedented test could be applied retroactively, even when employers had no possible way of knowing about the “ABC” test. While Borello was certainly imperfect, NFIB small business members feel strongly it is unfair to punish employers for following the law of the land at the time, which was Borello for nearly three decades.

Independent contractor relationships provide millions of small business owners and entrepreneurs the opportunity to pursue their dreams, yet the rigid “ABC” test established by Dynamex and the threat of litigation presented by retroactive application jeopardize these opportunities. NFIB small business members respectfully urge the adoption of the two amendments described above to AB 5 to significantly alleviate these concerns.

10. Prior Legislation:

AB 2496 (Gonzalez Fletcher) of 2018 would have created a rebuttable presumption that a worker in the janitorial field is an employee, and therefore is due the same protections and privileges as other employees. Governor Brown vetoed the bill, stating the following in his veto letter:

“I share the Author's concern about protecting the most vulnerable workers as well as the general concern about providing clarity regarding worker classification. The California Supreme Court recently issued a significant decision establishing a new test to determine whether a worker is properly classified as an employee or an independent contractor, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. The Administration and the Legislature are still reviewing this decision and any statutory changes to such tests would be premature.”

SUPPORT

California Labor Federation (Sponsor)

Amalgamated Transit Union

American Federation of State, County and Municipal Employees

Berkeley City Council

BlueGreen Alliance

California Alliance for Retired Americans

California Association of Health Underwriters

California Conference of Machinists

California Federation of Teachers

California Immigrant Policy Center

California Nevada Conference of Operating Engineers

California Nurses Association

California Partnership for Working Families

California Professional Firefighters

California Rural Legal Assistance Foundation

California School Employees Association

Center on Policy Initiatives, San Diego

Central Coast Alliance United for a Sustainable Economy

Communication Workers of America, District 9

Direct Selling Association

East Bay Alliance for a Sustainable Economy

Employees Rights Center

Engineers and Scientists of California, IFPTE, Local 20

Greater California Livery Association

Independent Insurance Agents and Brokers of California

Labor and Employment Committee of National Lawyers Guild

Legal Aid at Work

Los Angeles Alliance for a New Economy

National Association of Insurance and Financial Advisors of California

National Domestic Workers Alliance

National Employment Law Project

National Union of Healthcare Workers

Orange County Communities Organized for Responsible Development

Professional and Technical Engineers, IFPTE, Local 21

Professional Beauty Federation of California

SEIU CA

SEIU Local 1000

Shaklee Corporation

Sierra Club California

Southern California Coalition for Occupational Safety and Health

State Building and Construction Trades Council

Teamsters Public Affairs Council

The Greenlining Institute

Union of Concerned Scientists

UNITE HERE

United Auto Workers, Local 2865

United Auto Workers, Local 5810

United Domestic Workers, AFSCME Local 3930

United Farm Workers

United Food and Commercial Workers Western States Council

University Professional and Technical Employees, CWA Local 9119

Warehouse Worker Resource Center, Inland Empire

Western Center on Law and Poverty

Western States Council of Sheet Metal, Air, Rail and Transportation

Worksafe

9 to 5

OPPOSITION

Anthony Hopkins Investigations

California Aesthetic Alliance

California Association of Winegrape Growers

California Hospital Association

California League of Food Processors

California Podiatric Medical Association

California Society for Respiratory Care

California Trucking Association

Chino Valley Chamber of Commerce

Coalition of DMV Motor Carrier Permit Holders

El Dorado County Joint Chambers Commission

Electrologists’ Association of California

Electronic Transactions Association

Elk Grove Chamber of Commerce

Folsom Chamber of Commerce

Fontana Chamber of Commerce

Greater Coachella Valley Chamber of Commerce

Greater Ontario Business Council

Hayward Chamber of Commerce

Hesperia Chamber of Commerce

Indy Hub

Inland Empire Economic Partnership

Insights Association

Lavell Water Truck Service LLC

Moreno Valley Chamber of Commerce

Murrieta/Wildomar Chamber of Commerce

National Federation of Independent Business

Rancho Cordova Chamber of Commerce

Rancho Cucamonga Chamber of Commerce

Recording Industry Association of America

Redlands Chamber of Commerce

Roseville Area Chamber of Commerce

Rover Inc.

Santoro Transportation Inc.

Southern California Contractors Association

TechNet

Victor Valley Chamber of Commerce

Western States Trucking Association

107-individuals

-- END --

1. As noted in the decision, Dynamex drivers could decide the order of how they delivered the packages, had limited control over their schedules, and could (in theory) work for a rival package delivery company. ↑

Date of Hearing: April 3, 2019

ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT

Ash Kalra, Chair

ABPCA Bill Id:AB 5 (

Author:Gonzalez) – As Amended Ver:March 26, 2019

SUBJECT: Worker status: independent contractors

SUMMARY: Codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) that presumes a worker is an employee unless a hiring entity satisfies a three-factor test, and exempts from the test certain insurance occupations, physicians, securities broker-dealers, and direct salespersons.

Specifically, this bill:

1. States that it is the intent of the Legislature to codify the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, and clarify its application to state law.
2. Provides that for purposes of the labor code, where another definition of “employee” is not otherwise provided, and for the wage orders of the Industrial Welfare Commission (IWC), a person providing labor or services for remuneration shall be considered an employee unless the hiring entity satisfies all of the following conditions:
   1. The person 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. The person performs work that is outside the usual course of the hiring entity’s business.
   3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
3. Exempts from the application of Dynamex and instead, applies the definition of an employee as set forth in the decision of the California Supreme Court in S. G. Borello & Sons, Inc. v Department of Industrial Relations (Borello) (1989) 48 Cal.3d 341, to the following occupations:
   1. A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), and Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code.
   2. A physician and surgeon licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code.
   3. A securities broker-dealer or investment adviser or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.
   4. A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.
4. States that the above provisions are declaratory of existing law.

EXISTING LAW:

1. Creates a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits arising under wage orders issued by the IWC, as established in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.
2. Requires a 3-part test, commonly known as the “ABC” test, to establish that a worker is an independent contractor for the above purposes.
3. Establishes the Division of Labor Standards Enforcement (also known as the Labor Commissioner) within the Department of Industrial Relations, to among other things, enforce the wage orders of the IWC.

FISCAL EFFECT: Unknown

COMMENTS: The Dynamex decision was issued almost a year ago but debate over worker misclassification under our wage and hour laws continues to garner much attention. Worker misclassification is not a new concept. In fact, a 2000 study commissioned by the U.S. Department of Labor found that nationally between 10% and 30% of audited employers misclassified workers.^[1] As our workplaces and the nature of the employee-employer relationship evolves, new opportunities for misclassification have emerged. In 2017, California’s Employment Development Department Tax Audit Program conducted 7,937 audits and investigations, resulting in assessments totaling $249,981,712, and identified nearly half a million unreported employees.^[2] Recent research also supports the prevalence of misclassification and finds some of the highest misclassification rates in the economy’s growth industries, including home care, janitorial, trucking, construction, hospitality, security, and the app-based “on demand” sector.^[3]

California is not the first state to adopt the ABC test for determining employee status under its labor laws. New Jersey, Massachusetts, and Connecticut also use the ABC test to establish employment status for wage and hour laws. In fact, Massachusetts adopted the ABC test in 1990. Nearly 30 states use the test to determine employment status for purposes of unemployment insurance eligibility.

The Dynamex court adopted the ABC test after looking at the evolution of the employee-employer relationship historically and more specifically, the genesis of wage and hour law as a tool to remedy abuses arising from that relationship. According to the Dynamex court, a broad interpretation of employee status for purposes of California’s wage orders “finds its justification in the fundamental purposes and necessity of the minimum wage and maximum hour legislation in which the standard has traditionally been embodied. Wage and hour statutes and wage orders were adopted in recognition of the fact that individual workers generally possess less bargaining power than a hiring business and that workers’ fundamental need to earn income for their families’ survival may lead them to accept work for substandard wages or working conditions. The basic objective of wage and hour legislation and wage orders is to ensure that such workers are provided at least the minimal wages and working conditions that are necessary to enable them to obtain a subsistence standard of living and to protect the workers’ health and welfare.”^[4]

The court also addressed why the Borello test for employee status, arising from a workers’ compensation case involving farmworkers hired to harvest cucumbers under a written “sharefarmer” agreement, was inadequate for purposes of defining an employee under the wage orders. The test set forth in Borello involves the principal factor of “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired” and also includes the following nine additional factors: “(1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether in the locality the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) method of payment, whether by the
time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.”^[5]

The Dynamex court rejected the Borello test on the grounds that it is a multifactor, all circumstances standard with factors that can be given different weight depending on the case. The court expressed concerns that the multifactor test was not appropriate for wage and hour laws whose purpose is to protect workers and recognize their inherently dependent status in the employee-employer relationship.

Background on the Dynamex case

The State Supreme Court ruled in Dynamex that certain package delivery drivers were misclassified as independent contractors rather than employees under a California wage order specific to the transportation industry. In explaining the basis for its decision, the court focused on the relationship between Dynamex, a same-day courier and delivery service company, and its drivers who worked “on-demand.”

In finding that the on-demand drivers were employees, the court carefully reviewed and analyzed their working conditions. The court determined that the drivers were free to set their own schedule but had to tell Dynamex which days they intended to work. The drivers were required to obtain and pay for a cell phone so as to maintain contact with Dynamex. They generally made deliveries using their own vehicles but were also expected to wear Dynamex shirts and badges, and in some cases, attach a Dynamex decal to their vehicles. Drivers were mostly free to choose the sequence of their deliveries but were required to complete all assigned deliveries on the day of assignment.

Wage Orders of the IWC

The IWC, now inoperable, was established in 1913 to regulate wages, hours and working conditions in California. The commission has issued 17 wage orders over the years covering various industries in order to establish minimum wage and other protections for employees. These wage orders are enforced by the Labor Commissioner (LC). In Dynamex, the drivers argued that they were employees covered by Wage Order No. 9, pertaining to the transportation industry.

The IWC wage orders generally exempt three main categories of employees: administrative, executive, or professional. These exemptions largely mirror those that are carved out in the federal Fair Labor Standards Act.^[6] Employees working in these capacities are exempt from provisions such as minimum wage, overtime, meal and rest periods, and reporting time pay. An administrative employee is characterized as someone who customarily and regularly exercises discretion and independent judgment. An executive employee is characterized as someone who customarily and regularly directs the work of two or more other employees and has the authority to hire or fire employees. A professional employee is characterized as someone who is licensed or certified by the State of California and is primarily engaged in the practice of a recognized profession.

Committee Comments

The bill, in its present form, codifies and applies the ABC test to provisions of the labor code, as specified, and to the IWC’s wage orders. In the future, the author may wish to extend the application of the ABC test to provisions of the unemployment insurance code that cover critical employee benefits such as unemployment insurance and family leave programs.

This would also create more consistency among California’s various statutory definitions of “employee” and provide employees and employers greater certainty about their rights and responsibilities under the law.

Arguments in Support

According to the author, “The misclassification of workers is a clear detriment to working families, local businesses, and the state. This harmful practice undermines the hard-fought laws passed by the Legislature that have historically positioned California as a national leader in creating the strongest worker protections in the country.

AB 5 codifies the ABC test prescribed in the Court’s Dynamex ruling to help ensure that working Californians can retain all the rights and job protections afforded to employees under the California Labor Code. The bill will apply to provisions of the Labor Code that do not otherwise define “employee” and the wage orders of the Industrial Welfare Commission. AB 5 also clarifies…that the employment relationships for physicians, insurance agents and brokers, securities broker-dealers and investment advisors, and direct salespersons will be governed by the test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989). By codifying this landmark ruling, the bill creates a clear and consistent definition for employment and stands to raise the working standards for millions of workers in the state of California.”

Prior to Dynamex, workers were often in a catch-22, finding themselves treated by their hiring entity as both an employee and an independent contractor in different aspects of their job. The California Labor Federation, a sponsor of the bill, states that the ABC test “prevents the common practice in many industries of a company forcing an individual to act as an independent business while the company maintains the right to set rates, direct work, and impose discipline. It distinguishes carefully between a trucking company that has no employee drivers (misclassification) and a trucking company that contracts with a mechanic (legitimate contractor).

Bringing misclassified workers into employee status will mean more workers have a safety net when they are sick, laid off, or hurt at work. It will also significantly benefit the State. In the Dynamex case, the DLSE estimated that misclassification costs the state $7 billion annually. While calling a worker a contractor is cheaper for the company, someone has to bear those costs and, in most cases, it is the taxpayer that is forced to subsidize this business model.”

The ABC test also recognizes the reality of our evolving workplaces. In support, the UCLA Labor Center states, “Whereas once employers hired workers directly, many industries have turned to alternative models to retain labor and limit liability for wages, occupational safety, and taxes. Chief among these are franchising, contracting out labor to staffing agencies, and classifying workers as independent contractors. Standards, including wages, benefits, and safety, have eroded for the workforce performing the same labor under a different title. Individual workers bear the onus of determining whether they are legitimately employees or independent contractors, a status that too often results in sub-minimum wages and tax liabilities borne by poor people. All the risk shifts from employers to the workforce. Misclassification is wage theft.”

A coalition of employer organizations, including the California Chamber of Commerce, is support if amended, and states, “AB 5 (Gonzalez)…exempts certain industries/professions (doctors, insurance agents, securities brokers, and direct sellers) from the application of the Dynamex Operations West v. Superior Court (“Dynamex”) decision. While we appreciate the recognition in AB 5 that the Dynamex decision is not one size fits all and agree the professions identified should be exempted under AB 5, the Legislature should not stop with selecting just a few professions and not others similarly situated. Accordingly, we are seeking additional amendments that provide a more progressive and holistic approach to the application of Dynamex that reflects today’s modern workforce [.]”

Arguments in Opposition

The Southwest California Legislative Council, is opposed and states, “the rise of independent contractors has served to ignite large portions of the California economy, encourage entrepreneurship, and provide income for an estimated 4 million workers. Many of our members are local entrepreneurs who contract their services out to a variety of businesses, enabling them to benefit from multiple income streams. Indeed, independent contractor status has fostered the growth of the so-called ‘gig’ economy, with companies like Uber and Lyft, which enable thousands of college students, active duty military personnel and others to fill spare-time hours and generate income.”

Related Legislation

AB 71 (Melendez) of 2019 would require a determination of whether a person is an employee or an independent contractor to be based on a specific multifactor test, including whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired, and other identified factors. The measure is pending in this committee.

AB 233 (Cooley) of 2019 would provide that “employee,” for purposes of California wage orders of the Industrial Welfare Commission, the Labor Code, the Unemployment Insurance Code, the Division of Workers’ Compensation, or any other purpose related to the characterization of employees and independent contractors under statute or common law, shall not include a person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), and Chapter 8 (commencing with Section 1831) of Part 2 of Division 1, and who has entered into a written agreement with an insurer or organizational licensee, as specified. The measure is pending in the Assembly Insurance Committee.

SB 238 (Grove) of 2019 would require for purposes of claims for wages and benefits arising under wage orders, an analysis of whether the worker is economically dependent upon the hiring entity to determine whether that worker is an employee based upon the economic reality of the relationship with the hiring entity. The bill would require this analysis to be based solely upon enumerated factors that are similar to those used as a part of the Economic Realities Test in the federal Fair Labor Standards Act of 1938. The measure is pending in the Senate Rules Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

AFSCME

Bet Tzedek Legal Services
California Conference Board Of The Amalgamated Transit Union
California Conference Of Machinists
California Employment Lawyers Association
California Healthy Nail Salon Collaborative
California Immigrant Policy Center
California Labor Federation (Sponsor)
California Nurses Association
California Professional Firefighters
California Rural Legal Assistance Foundation, Inc.
California Teamsters Public Affairs Council
Consumer Attorneys Of California
Direct Selling Association
Engineers And Scientists Of California Local 20
Inlandboatmen'S Union Of The Pacific
International Union Of Operating Engineers, Cal-Nevada Conference
Maintenance Cooperation Trust Fund
National Employment Law Project

Numerous Individuals

Professional & Technical Engineers, Local 21
SAG-AFTRA

SEIU California (Cosponsor)
State Building And Construction Trades Council Of Ca

UCLA Labor Center
Unite Here International Union
United Domestic Workers Of America-AFSCME Local 3930
United Food And Commercial Workers, Western States Council
Utility Workers Union Of America, Local 132
Worksafe

Support if Amended

American Trucking Associations, Inc.
Association Of Language Companies
Atkinson Andelson Loya Ruud & Romo
Calasian Chamber Of Commerce
California Ambulance Association
California Association Of Licensed Investigators
California Building Industry Association
California Chamber Of Commerce
California Coalition Of Travel Organizations
California Construction & Industrial Materials Association
California Defense Counsel
California Employment Law Council
California Forestry Association
California League Of Food Producers
California News Publishers Association
California Retailers Association
Citizens Against Lawsuit Abuse
Civil Justice Association Of California
Electronic Transactions Association
Glamsquad, Inc.
Ipse - The Association Of Independent Workers
National Council For Languages And International Studies
Pro Small Biz Ca
Professional Independent Consultants Of America, Inc.
Rover.Com
Sacramento Regional Builders Exchange
San Gabriel Valley Economic Partnership
Silicon Valley Leadership Group
The Joint National Committee For Languages
Western States Trucking Association

Oppose

Numerous Individuals

Southwest California Legislative Council

Analysis Prepared by: Megan Lane / L. & E. /

1. See the National Employment Law Project’s (NELP) Fact Sheet “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries,” https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-on-workers-and-federal-and-state-treasuries-update-2017/. ↑

2. Employment Development Department 2018 Annual Report on Fraud Deterrence and Detection Activities, https://edd.ca.gov/About_EDD/pdf/Fraud_Deterrence_and_Detection_Activities_2018.pdf. ↑

3. See NELP’s Fact Sheet in footnote 1. ↑

4. Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 952. ↑

5. S. G. Borello & Sons, Inc. v Department of Industrial Relations (1989) 48 Cal.3d 341. ↑

6. See 29 CFR Part 541, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Computer and Outside Sales Employees.” This provision is commonly known as the “white collar” exemption. ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 5

Author:(Gonzalez)

As Amended Ver:May 24, 2019

Majority vote

SUMMARY:

Codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) that presumes a worker is an employee unless a hiring entity satisfies a three-factor test, and exempts from the test certain insurance and real estate occupations, physicians, securities broker-dealers, direct salespersons, hair stylists and barbers, and those performing work under a contract for professional services, as specified.

Major Provisions

1. Provides that for purposes of the Labor Code and the Unemployment Insurance Code, where another definition of "employee" is not otherwise provided, and for the wage orders of the Industrial Welfare Commission (IWC), a person providing labor or services for remuneration shall be considered an employee unless the hiring entity satisfies all of the following conditions:
   1. The person 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. The person performs work that is outside the usual course of the hiring entity's business.
   3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
2. Exempts from the application of Dynamex and instead, applies the definition of an employee as set forth in the decision of the California Supreme Court in S. G. Borello & Sons, Inc. v Department of Industrial Relations (Borello) (1989) 48 Cal.3d 341, to the following occupations:
   1. A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), and Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code.
   2. A physician and surgeon licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Corporations Code Section 13401.
   3. A securities broker-dealer or investment adviser or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.
   4. A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.
   5. A real estate licensee licensed by the State of California pursuant to Division 4 of the Business and Professions Code, except where their employment is otherwise defined by Business and Professions Code Section 10032(b) and for purposes of unemployment and workers' compensation insurance.
   6. Individuals providing hairstyling and barbering services who have a booth rental permit and are free from the direction and control of the hiring entity, as defined.
   7. Individuals engaged in professional services, as defined, and exclusive of professionals in the health care and medical fields, provided that nine separate elements are established, including among other things, that the individual has the ability to use their own employees, engage in contracts for services with other entities, negotiate their own compensation, set their own hours, and customarily exercise discretion and independent judgment in the performance of services.

COMMENTS:

None.

According to the Author:

"The misclassification of workers is a clear detriment to working families, local businesses, and the state. This harmful practice undermines the hard-fought laws passed by the Legislature that have historically positioned California as a national leader in creating the strongest worker protections in the country. AB 5 codifies the ABC test prescribed in the Court's Dynamex ruling to help ensure that working Californians can retain all the rights and job protections afforded to employees under the California Labor Code."

Arguments in Support:

The California Labor Federation, sponsor of this bill, states that the ABC test "prevents the common practice in many industries of a company forcing an individual to act as an independent business while the company maintains the right to set rates, direct work, and impose discipline. It distinguishes carefully between a trucking company that has no employee drivers (misclassification) and a trucking company that contracts with a mechanic (legitimate contractor). Bringing misclassified workers into employee status will mean more workers have a safety net when they are sick, laid off, or hurt at work."

Arguments in Opposition:

The Southwest California Legislative Council, is opposed and states, "the rise of independent contractors has served to ignite large portions of the California economy, encourage entrepreneurship, and provide income for an estimated 4 million workers. Many of our members are local entrepreneurs who contract their services out to a variety of businesses, enabling them to benefit from multiple income streams."

FISCAL COMMENTS:

According to the Assembly Appropriations Committee, there is considerable uncertainty around the fiscal impact of this bill. Widespread adoption of the ABC test will, relative to current law, likely lead to more workers classified as employees rather than independent contractors. This will generate additional workload and costs for the Department of Industrial Relations (DIR) and the Employment Development Department (EDD), though costs would be partially offset by a simpler process to determine a worker's classification.

Moreover, as drafted, it is unclear how broadly the ABC test will be applied under this bill. Appropriations Committee assumes the bill's fiscal impact is primarily related to DIR and enforcement of the Labor Code. Costs to DIR's Division of Labor Standards Enforcement (DLSE) will be $840,000 in the first year and $800,000 each year thereafter, and there will be an unknown fiscal impact on DIR's Department of Workers' Compensation (DWC). These costs reflect the costs of additional legal staff and the costs of preparing and updating guidance for the public and staff.

VOTES:

ASM LABOR AND EMPLOYMENT: 5-0-2

YES: Kalra, Carrillo, Gonzalez, Jones-Sawyer, Luz Rivas

ABS, ABST OR NV: Flora, Diep

ASM APPROPRIATIONS: 13-3-2

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Brough, Fong, Obernolte

ABS, ABST OR NV: Bigelow, Diep

UPDATED:

VERSION: May 24, 2019

CONSULTANT: Megan Lane / L. & E. / (916) 319-2091 FN: 0001028

ASSEMBLY THIRD READING

ATR Bill Id:AB 5

Author:(Gonzalez)

As Amended Ver:May 1, 2019

Majority vote

SUMMARY:

Codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) that presumes a worker is an employee unless a hiring entity satisfies a three-factor test, and exempts from the test certain insurance occupations, physicians, securities broker-dealers, and direct salespersons.

Major Provisions

1. Provides that for purposes of the labor code and the unemployment insurance code, where another definition of "employee" is not otherwise provided, and for the wage orders of the Industrial Welfare Commission (IWC), a person providing labor or services for remuneration shall be considered an employee unless the hiring entity satisfies all of the following conditions:
   1. The person 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. The person performs work that is outside the usual course of the hiring entity's business.
   3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
2. Exempts from the application of Dynamex and instead, applies the definition of an employee as set forth in the decision of the California Supreme Court in S. G. Borello & Sons, Inc. v Department of Industrial Relations (Borello) (1989) 48 Cal.3d 341, to the following occupations:
   1. A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (Section 1621), Chapter 6 (Section 1760), and Chapter 8 (Section 1831) of Division 1, Part 2 of the Insurance Code.
   2. A physician and surgeon licensed by the State of California pursuant to Division 2 (Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code.
   3. A securities broker-dealer or investment adviser or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California under Chapter 2 (Section 25210) or Chapter 3 (Section 25230) of Division 1, Title 4, Part 3, of the Corporations Code.
   4. A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.

COMMENTS:

None.

According to the Author:

"The misclassification of workers is a clear detriment to working families, local businesses, and the state. This harmful practice undermines the hard-fought laws passed by the Legislature that have historically positioned California as a national leader in creating the strongest worker protections in the country. AB 5 codifies the ABC test prescribed in the Court's Dynamex ruling to help ensure that working Californians can retain all the rights and job protections afforded to employees under the California Labor Code."

Arguments in Support:

The California Labor Federation, sponsor of the bill, states that the ABC test "prevents the common practice in many industries of a company forcing an individual to act as an independent business while the company maintains the right to set rates, direct work, and impose discipline. It distinguishes carefully between a trucking company that has no employee drivers (misclassification) and a trucking company that contracts with a mechanic (legitimate contractor). Bringing misclassified workers into employee status will mean more workers have a safety net when they are sick, laid off, or hurt at work."

Arguments in Opposition:

The Southwest California Legislative Council, is opposed and states, "the rise of independent contractors has served to ignite large portions of the California economy, encourage entrepreneurship, and provide income for an estimated 4 million workers. Many of our members are local entrepreneurs who contract their services out to a variety of businesses, enabling them to benefit from multiple income streams."

FISCAL COMMENTS:

According to the Assembly Appropriations Committee, there is considerable uncertainty around the fiscal impact of this bill. Widespread adoption of the ABC test will, relative to current law, likely lead to more workers classified as employees rather than independent contractors. This will generate additional workload and costs for the Department of Industrial Relations (DIR) and the Employment Development Department (EDD), though costs would be partially offset by a simpler process to determine a worker's classification.

Moreover, as drafted, it is unclear how broadly the ABC test will be applied under this bill. Appropriations Committee assumes the bill's fiscal impact is primarily related to DIR and enforcement of the Labor Code. Costs to DIR's Division of Labor Standards Enforcement (DLSE) will be $840,000 in the first year and $800,000 each year thereafter, and there will be an unknown fiscal impact on DIR's Department of Workers' Compensation (DWC). These costs reflect the costs of additional legal staff and the costs of preparing and updating guidance for the public and staff.

VOTES:

ASM LABOR AND EMPLOYMENT: 5-0-2

YES: Kalra, Carrillo, Gonzalez, Jones-Sawyer, Luz Rivas

ABS, ABST OR NV: Flora, Diep

ASM APPROPRIATIONS: 13-3-2

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Brough, Fong, Obernolte

ABS, ABST OR NV: Bigelow, Diep

UPDATED:

VERSION: May 1, 2019

CONSULTANT: Megan Lane / L. & E. / (916) 319-2091 FN: 0000535

Date of Hearing: May 16, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 5

Author:(Gonzalez) – As Amended Ver:May 1, 2019

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill clarifies the determination of whether a worker is an employee. Specifically, this bill:

1. Codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex) that presumes a worker is an employee unless a hiring entity satisfies a three-factor test (ABC test).
2. Applies the ABC test to the Labor Code and Unemployment Insurance Code (UIC) for instances when a definition of employee is not otherwise provided.
3. Exempts specified occupations from the application of ABC test and instead applies, for these occupations, the definition of an employee set forth in S. G. Borello & Sons, Inc. v Department of Industrial Relations (Borello).

FISCAL EFFECT:

There is considerable uncertainty around the fiscal impact of this bill. Widespread adoption of the ABC test will, relative to current law, likely lead to more workers classified as employees rather than independent contractors. This will generate additional workload and costs for the Department of Industrial Relations (DIR) and the Employment Development Department (EDD), though costs would be partially offset by a simpler process to determine a worker’s classification.

Moreover, as drafted, it is unclear how broadly the ABC test will be applied under this bill. This committee assumes the bill’s fiscal impact is primarily related to DIR and enforcement of the Labor Code. (For a discussion of possible EDD costs, please refer to Staff Comment #4.) Costs to DIR’s Division of Labor Standards Enforcement (DLSE) will be $840,000 in the first year and $800,000 each year thereafter, and there will be an unknown fiscal impact on DIR’s Department of Workers’ Compensation (DWC). These costs reflect the costs of additional legal staff and the costs of preparing and updating guidance for the public and staff.

COMMENTS:

1. Worker classification tests. The determination of whether a worker is an employee is typically a test that evaluates the nature of the employer’s relationship with the worker. In California’s labor law context, the discussion generally revolves around two types of tests:
   1. Borello test. The Borello test involves the principal factor of “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired” and also includes the following nine additional factors:

(1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether in the locality the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.

• 1. The ABC test. The ABC test is much more simple (and actually predates the Borello test). The determination of a worker’s classification rests on these three prongs: (A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) 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.

1. Dynamex. The State Supreme Court, in its Dynamex ruling, concluded that certain package delivery drivers were misclassified as independent contractors rather than employees under a California wage order specific to the transportation industry. The court adopted the ABC test and rejected the Borello test, in part, on the grounds the test was not appropriate for wage and hour laws whose purpose is to protect workers.
2. Recent DIR letter. On May 3, 2019, DIR released a letter clarifying its application of the ABC test. The letter concludes that to “the extent that the claims rest on the ‘failure to fulfill obligations imposed by’ an applicable Industrial Welfare Commission (IWC) wage order, the ABC test applies.” The letter further elaborates the test will also apply to “obligations imposed by a wage order,” which applies to Labor Code sections enforcing wage orders. As an example, DIR cites LC Section 203, which imposes a penalty for wages not paid at the time of termination of employment. DIR notes that where this section serves to enforce the underlying minimum wage obligations of the wage orders, application of the ABC test would be appropriate.
3. Staff comment on EDD costs. The author recently amended this bill to extend the application of the ABC test to the UIC in cases where another definition of employee is not otherwise provided. However, it is unclear what instances this would apply to since UIC Section 621 defines an employee as an individual who is an employee as applied by common law rules. It is the committee’s understanding that the author intends to apply the ABC test more broadly to the UIC. In that case, the state costs with this proposal would increase significantly. Specifically:
4. Significant administrative workload and costs – possibly in excess of $1 million – for the Employment Development Department (EDD) to develop regulations and update materials and guidelines. While typically EDD can promulgate regulations within existing resources, this bill may require additional attorneys and staff, which could increase personnel costs by approximately $350,000. Moreover, EDD would need to conduct a significant review and update of the guidance and information it provides employers and employees related to employment determination, which will create significant new costs of an unknown amount.
5. Unknown costs to state programs because of a possible shift in the reclassification of workers. EDD currently applies a range of factors when determining whether a worker is an employee or independent contractor. It is likely that the ABC test, in many cases, will yield the same determination as EDD’s current standard. However, on net, there may more workers classified as employees compared to EDD’s current practice. If more workers are classified as employees because of this bill, there could be increased revenues into, and expenditures from, the Disability Insurance (DI) Fund, which supports the State Disability Insurance Program and the Paid Family Leave Program, and the Unemployment Insurance (UI) Fund, which supports unemployment benefits.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081