February 2020

On September 18, 2019 Governor Newsom signed AB-5, codifying the now-infamous Dynamex decision as law. This new law radically changes the legal test for who is an employee (rather than an independent contractor) under California law. While the law has gotten a lot of press in the context of the so-called “gig” economy; AB-5 affects the way all California businesses may legally use independent contractors, including yours.

How Has the Law on Independent Contractors Changed?

As a result of AB-5, California law assumes that anyone working for you is an employee unless he or she is engaged in one of the specifically exempt activities. For everyone else previously classified as an independent contractor, they must be reclassified as an employee unless you employer can prove that the worker meets ALL THREE of the following criteria:

1. The person is free from your control and direction.  This means you cannot tell the worker when to work or how to go about doing their job.  That is not to say that if you hire, say, a contractor to build you a new office space, you can’t tell the contractor what the office space should look like, or set deadlines for when the work will be completed. It does mean that you cannot require the contractor to adhere to an hourly schedule of your choosing, hold a hammer the way you tell him to, or use your chosen software to draft his invoices.
2. The person performs work outside the usual course of your business. This is the issue most likely to trip up the traditional independent contractor model for small businesses. If you run a business that provides a service, anyone you hire to perform that service probably must be classified as your employee. If you run a fitness studio, your instructors are probably employees. If you run a web design company, your web designers are probably employees. This is true even if those people keep their own schedules and/or perform substantially similar services for other organizations. The key question under this part of the AB-5 test is whether the worker is engaged in the same service that the company exists to perform.
3. The person is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed. In other words, the worker must be free to – and in fact does – perform substantially similar work for one or more additional businesses. If they’re just working for you, rather than running their own service of which you are one of several clients, they’re probably now your employee. Classic examples of such independent operators are plumbers, electricians, or web designers. Typically these specialists operate their own businesses, and provide their services to any number of organizations.

What Happens to Businesses That Don’t Classify Their Workers Appropriately?

This is a new labor environment for California small business owners, and those who do not make necessary changes may find themselves facing considerable wage and hour penalties as well as other more costly forms of liability.

What Can You Do to Protect Yourself?

Depending on the nature, scale, and model of your business, you may need to make significant changes (e.g. re-classifying independent contractors as employees) or smaller changes (re-structuring your existing contracts to reflect the changes to the law).  There is no “one size fits all” solution, but competent legal counsel with a thorough understanding of your businesses goals and needs can offer important updates on the status of the law and guidance to get you on the right path to protect yourself and your business.

DISCLAIMER:  This Advisor is one of a series of business, real estate, employment, estate planning and tax bulletins prepared by the attorneys at Fauver, Large, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution or use of this Advisor.