Just one year and one month since the Dynamex decision rocked the pillars of California’s worker classification regime, it’s come to this: On May 29, 2019, the California legislature overwhelmingly passed Assembly Bill 5 (AB5). That bill, which is now off to the State Senate, seeks to codify as law the ABC test as the preeminent test for Independent Contractor (IC) misclassification in the state. All signs point toward the bill becoming law, and while we can say that we saw this coming, let’s focus on what your business needs to know.
Rehashing the prongs of the ABC test (which most of us compliance policy wonks can recite in our sleep at this point) may be unnecessary. But for those of you who would like a refresher, take a quick look at our article we published about this last year.
Since the Dynamex decision, we’ve strongly advocated for businesses to presume that ABC would end up being the test throughout the state when it comes to IC classification. Like many court cases that have been filed since Dynamex, AB5 expands the reach of the ABC test beyond strictly Wage Orders, and makes it the test for all provisions of the Labor Code and Unemployment Insurance code as well. So, as we’ve noted before, for California, your business should be doing its best to comply with ABC.
When reading the law, many legal minds attempt to look for the loopholes, or shall we say, exceptions to the rule. AB5 does exclude some specific professions from its grasp, such as certain health care professionals, lawyers, insurance agents, hairdressers, brokers, and real estate licensees. Before getting too deep into searching for exempt populations within your contingent workforce program, however, please note that these categories of workers aren’t conclusively ICs under the law; it just means that any misclassification claims involving those sets of workers would be determinized under the Borello test, and not ABC.
So, have we reached a point of no return with Dynamex? Do all your ICs need to be W-2s in the Golden State? No to both. AB5 isn’t final just yet, and it was revised prior to passing the Assembly. Besides that, courts will continue to add layers to what ABC means, particularly as it pertains to Prong B’s requirement that your ICs be performing services that are outside the course of your company’s business.
Forward-thinking compliance companies (TalentWave included – please excuse the sound of our own horn tooting) have been planning for this for over a year when the original decision dropped. We’ve added layers to our own process to account for Dynamex. In fact, we suspected it would apply retroactively (which was recently confirmed). So, from the beginning we’ve looked backwards as well as forward to ensure continued compliance as the details of this law continue to be fleshed out and become more concrete
If you haven’t done all of the above (or anything for that matter), don’t panic! That said, you also can’t afford to wait any longer to act. Take swift measures to comply with Prong B by defining your ordinary course of business, audit your ICs to find out what services they are providing, and be sure to execute a bulletproof compliance program to avoid stiff fines and penalties related to worker misclassification. California already has a tremendously complex labor code, and the Dynamex ruling will broaden the instances in how workers may not quality as ICs. The notoriety of the Dynamex decision and the size and influence a state like California has could mean that other states may follow. So, while Dynamex and now AB5 have sent new tremors across the state, California may only be the epicenter of further changes to come nationwide.
P.S. – There’s indeed, no rest for the weary, when it comes to navigating these complex labor laws. But TalentWave has a Health Check designed to do exactly what California companies need to do to mitigate their risk. We deliver a thorough assessment of your business’ independent worker population that provides visibility into your existing contingent labor spend and worker classification. Is it time for a Health Check as AB5 makes its way through the legislative arena?