On September 18, 2019, California Governor Gavin Newsom signed into law AB-5, which has been referred to as the “Gig Worker Protection Bill.” The new law codifies a recent California Supreme Court Ruling (Dynamex) and effectively reclassifies many workers (synonymous with the term “individual” as used in the new law) from independent contractors to employees. This post briefly explains the new rule and provides a comprehensive and easily digestible table that lists the various types of workers, individuals, and entities that are exempt from the new rule.
The New Rule
The new rule states that a person is considered an employee (as opposed to an independent contractor) unless each of the following statements is true:
The person is free from the control and direction of the hiring entity in connection with the performance of the work;
The person performs work that is outside the usual course of the hiring entity’s business; and
The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The most significant change to existing law comes from statement B, which forces companies to ask, “Does this person perform work that is outside the usual course of our business?” Many gig-economy businesses rely on independent contractors to perform necessary functions for their business (e.g. drivers for ride-share apps, tutors for tutoring apps, handymen for task apps). Undoubtedly, there will be lengthy and expensive legal battles fought by well-funded multi-nationals like Uber, in which the companies will argue that the work performed by their independent contractors is outside the usual course of the companies’ businesses. Given the costly nature of misclassification lawsuits, however, many small businesses will decide to mitigate this risk by reclassifying certain independent contractors.
Exceptions to the New Rule
Specific categories of workers, individuals, and entities are exempt from the new rule. The table below lists the categories of exemption, along with additional requirements for the exemption. However, simply because a worker fits one of the below exemptions, does not mean that the worker is an independent contractor. If the new rule does not apply, the worker’s classification will either be determined by the old standard for independent contractors (the Borello standard) or by a specific statute. Given the ambiguities in the new law and the potential liability for misclassifying employees, you should not rely on your own interpretation of the new law for matters of employee classification. An experienced employment lawyer can assist you in properly classifying your employees and documenting policies that minimize your potential liability.
If you are concerned that one or more of your businesses’ independent contractors is misclassified, read this post regarding the process of reclassifying independent contractors.