Article / Risk Management
The ABCs of independent contractor vs. employee classification

California Assembly Bill (AB 5) went into effect on January 1, 2020. AB 5 defines who is an employee for the
purposes of workers’ compensation, effective July 1, 2020. This allows employers six months to provide workers’ compensation coverage for persons who will now be considered employees under the law. The bill does not allow employers to reclassify an employee as an independent contractor due to its enactment.

AB 5 was enacted to codify and clarify the application of the California Supreme Court’s decision in Dynamex Operations West Inc. v. Superior Court (2018) 4 Cal. 5th 903. In Dynamex, the Supreme Court held that a worker is considered an independent contractor only if the hiring
entity establishes that:

  • 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;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • 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.

This “ABC test” permits workers to be classified as independent contractors only if the hiring business demonstrates the worker in question satisfies all three conditions. The question of whether the test applies retroactively is currently certified to the state supreme court.

Labor Code Section 2750.3 lists the following professions excluded from Dynamex, leaving employment status to remain governed by Borello:

  • Insurance agent.
  • Physician, surgeon, dentist, podiatrist, psychologist or veterinarian licensed by the state of California.
  • An individual who holds an active license from the state of California and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator or  accountant.
  • A securities broker-dealer or investment adviser or their agents and representatives.
  • A direct sales salesperson.
  • A commercial fisherman working on an American vessel.

Willful misclassification of an individual as an independent contractor can come with hefty penalties. Labor Code Section 226.8 allows for fines of $5,000-$15,000 for each willful misclassification, and fines of $10,000-$25,000 for each violation if it is determined that a “pattern or practice” of violations exists.

*Please note that on January 15, 2020, AB 1928 was introduced as an urgency bill. The bill would largely repeal AB 5. It is pending to be heard. More correspondence will be forthcoming should this bill be approved.

Please reach out to anyone on your Lockton team should you have any questions.

    
< Back to Insights & Publications
Discover more Insights & Publications  |  Read more in the Lockton Newsroom  |  See our Client Stories
Read more in the Lockton Newsroom
See our Client Stories