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California Adopts Strict Limits on Independent Contractors

California has implemented a new law extending the state Supreme Court’s Dynamex standard, placing strict limits on the use of independent contractors, to most workplaces throughout the state. With a few exceptions, workers within an employer’s business or industry (or without their own truly independent operation) will be deemed employees rather than contractors for most employment issues such as pay, payroll taxes, and workers compensation.


Last year, the California Supreme Court’s Dynamex decision adopted a new three-part test for establishing whether a worker is an employee or independent contractor under the state wage orders. This new standard applied an “ABC” test requiring businesses to show that an independent contractor was free from its “control and direction,” provided work outside the usual course of the business, and maintained an independently established trade, occupation or business of the same type as the work performed. The second part of the test created the most difficulty for businesses because, in many cases, contractors have been used for work that could be considered within rather than outside a company’s business (most famous example: rideshare drivers).


Last month, Governor Newsom approved A.B. 5, creating a new Labor Code section 2750.3 extending the “ABC” test beyond wage orders to almost all areas of employment. This includes not only wages, overtime and rest/meal periods but also whether workers compensation coverage applies, unemployment and payroll taxes must be paid, and mandated benefits (such as sick leave) must be provided. Under Section 2750.3, a business must meet all three Dynamex or “ABC” tests to show that a worker was a non-employee independent contractor.


The law has important exceptions and, where the exceptions apply, contractor status will be determined by the state’s more traditional Borello test. That test focuses on the amount of control a business has over the “manner and means” of an individual’s work with far less focus on the specific nature of the worker’s duties.


As a practical matter, the new law may not change much for most employers whose workers would have been forced into an employment relationship under Dyamex. The law is a wake-up call to all businesses, though, who should now carefully examine whether casual and longer-term workers ought to be treated as employees rather than independent contractors. The law includes important exceptions for certain types of independent businesses such as marketing, human resources, graphic design, and beauty services. It also excludes various licensed professions (such as attorneys) and bona-fide business-to-business relationships.


The new law applies effective January 1, 2020, and can be viewed here.