Episode 38: What to Expect From New Independent Contractor Classification Law; Webinar, Free White Paper Available Now

Welcome to the Workplace, a podcast by Cal Chamber. I'm Alan Zarenberg, president of the California Chamber of Commerce. And today on the podcast, I'm joined by two employment law experts, Jennifer Barrera, who oversees our advocacy and policy, and Erica Frank, our general counsel. Today we're going to discuss AB5 and independent contractors and. And the Dynamex decision, a topic that we spent a lot of time discussing. But now that we're ready to implement it and the state is, it merits a further and more in depth discussion. So before we go on to AB5, why don't we talk. Erica, maybe can talk a little bit about the Dynamex court case, which were facts based in 2004, but the decision was made in 2017, right? 2018.

Yes.

And it has an impact on how AB5 was created and how people positioned on AB5. So I think it's important to have a brief discussion there.

Yep, absolutely, Alan, thank you. So, as Alan had mentioned, in 2018, it was around end of April, beginning Of May of 2018, the California Supreme Court issued the decision in what's called the Dynamics Operation west versus Superior Court case. And the significance of the decision was the California Supreme Court created a new test that would be applied to determine whether a worker is an independent contractor or an employee. Before the Dynamex ruling, courts would look at a multi factor test, which we often call the Borrello test, that included a number of different factors, all of them weighted differently, that would decide or determine whether a worker is an independent contractor or an employee. Dynamax, though, changed this and turned the test upside down and created what we call the ABC test, which is a strict test, meaning that all three components have to be met. And if they're all met, then that worker is an independent contractor. If they're not met, then that worker is an employee.

So based on that as the background, this year we got AB5, which sort of codifies the court case. And some people would say, well, why didn't you just oppose AB5? That codified the court case. Because the court case dealt with some old facts in a limited circumstance. And I think there's. For some industries and businesses, there was some benefits to AB5, right, Jennifer?

Right.

So we had a supportive amended position on AB5, which was a little bit unique. And I think most people just thought we were going to oppose it. But the challenge is that with or without AB5, we still had the court decision that Erica just mentioned, which is essentially applicable to everyone, unless there was some parameters put around It. And so, yes, AB5 codified that court decision. It codified the ABC test for independent contractor status, but then it provided a list of exemptions under which certain professions and and industries would not have to follow that ABC test and they could revert back to Borrello. So that was the positive of it, the clarity on all those exemptions, which is why we had a supportive amended position to really support additional exemptions for individuals and professions that should be under the Borrello standard.

Okay, so let's just make sure everybody understands when we refer to Borrello. Borrello was also a court case. This is the first time, am I correct, that the legislature's really weighed in on who's an independent contractor and who's an employee?

Yes, that is correct.

So the Borrello factors was a case from what, the 1980s?

Yes, that's correct.

And it established 10 factors. And this is important, Right. Maybe you can expand upon this because when you get an exemption to be exempted from the ABC test, you're not considered to be.

An independent contractor. You also have to go through a different test called the Borrello factors, correct?

Yes. And I think that's a really important thing to emphasize, is just because your industry is exempt from the ABC test doesn't mean the analysis is over. What that means is the ABC test doesn't apply. Instead, this Borrello multifactor test applies. So what the Borrello factors look like is the the ability of the business to terminate the relationship at will, whether the person performing the services is engaged in a distinct occupation, how much control does the business or the hiring entity have over the person that's doing the work? How much time is that person spending doing the work? So like Alan said, There's 10 or more elements that you can use and to demonstrate whether or not a worker is an employee or an independent contractor. The ABC test is just three. And those three components is whether that worker is free from the hiring entity's control and direction in connection with the work that they're performing, whether the worker performs work that is outside the usual course of the hiring entity's business, and C whether that worker is customarily engaged in an independent established trade, meaning that they have other people that they're working with, they have a business. And so the strict liability, if you will, of the ABC test is what really created a lot of concern by the business community and independent contractors, for that matter, which is what necessitated AB5.

So, Jennifer, maybe you can talk a little bit about. There's exemptions in AB5. Because the ABC test just doesn't make sense for everybody, does it? So when the court made the decision that they made it on a limited set of circumstances, they only applied it to that case, although they used this presumption that people were going to be employees until you could prove otherwise. And it subjected a lot of people to possible litigation. But in the legislative process where they took testimony, it was quite clear the ABC test just doesn't make sense for everybody. So maybe you can talk a little bit about how they determined who was exempted, who goes under the Borrello standards and what we're going to see in the future.

Yeah, I think that's right. I mean, the ABC test, you know, the proponents of it basically like applauded it for its simplicity. You only have to worry about three factors. But it's really that B factor that concerned so many different industries and professions. The one that said you cannot be performing any work that's the usual course of the business really implicates so many different industries and professions who historically operate as independent contractors. So a couple of good examples. One, insurance agents, they have always historically been independent contractors and basically an insurance agent would not meet that B factor potentially because they are performing the usual work of the insurance company business, which is selling insurance. And so they were one of the first industries to be exempted under AB5 because they just had a historical pattern of being utilized or referenced as independent contractors. And there was no high risk of misclassification in that industry, which is one of the things that the labor unions and proponents of AB5 looked at for providing exemptions and basically how they've been historically treated. So insurance agents, doctors who contract with hospitals, hairstylists who just rent a booth and but set their own rates and set their own hours, historically have been independent contractors. And under AB5 they can continue to do so if they meet the Borrello test. There's a long list of industries and individuals who were provided with that exemption, but really the labor unions and proponents were looking at how they historically been treating it. Been treated. Is there a high risk of misclassification in that industry or profession? And another key factor that they really looked at was do they have the ability to negotiate and set their own rates.

So there was a. I think this is an important discussion to have because the press focused merely on the ride sharing companies. I mean, every day you would read a story and it was about the ride sharing companies. But there are a lot of industries that are impacted by that. The court didn't have facts about. So the legislature had to consider those. And should we assume that what's in AB5 the exemptions are the extent of who's going to be tested under the Borrello factors?

I would suspect that next year, once January 1st hits, we're going to see a ton of bills introduced by different industries and professions who were not included in AB5 but but nonetheless believe that they deserve an exemption from the ABC test as well.

I think in a minute here we're going to discuss who the law applies to today because that's what everybody needs to know. Not what it might be a year from now, but who is impacted by January 1st. But are there common threads about who, as you put it, the labor unions were some of the sponsors of AB5 and I think it Were they more concerned about low wage workers and not as concerned about people who make a higher level of wage or reimbursements?

Yeah, yeah. I mean definitely you can see some common trends in AB5 with the exemptions that were granted. A lot of the individuals or professions provided with an exemption are highly trained, highly educated, often work independently. Individuals who have a professional license of some kind was also another consideration that was given and really have the, I would say the bargaining power to negotiate their own rates with a business that they're contracting for services. And labor unions are and have always been concerned about low wage workers and their ability to kind of negotiate their own rates and their own work conditions. And so yeah, that was definitely a concern when looking at AB5 exemptions on who they were protecting. So that's one of the common trends that you can see. Real estate agents, doctors, lawyers, accountants, again I mentioned insurance agents. Those are all highly trained professionals who are licensed with an educated and work independently. So yeah, that was a common thread.

Okay, so let's talk about January 1st. The law goes into effect even though we've had the court case in effect for almost a year and a half now. Who determines the independent contractor status? Is it the worker or is it the employer? Erica?

Yeah, so this is a really important thing for folks to understand that the burden is on the business to establish that the individuals that are working for that business, if they're not employees, that they meet the independent contractor test of either ABC or Borrello. So AB5 lists a number of excluded industries, professions, relationships, and each exclusion is very specific and very particular to what the law says in the bill. And again, like we've been saying, if you don't meet the exclusion, then Borrello. So for Example, like what Jennifer was talking about, one of the big exclusions are specific occupations, such as those physicians, surgeons, veterinarians, lawyers, licensed to practice. As Jennifer had pointed out, those are industries and individuals whose professions have oftentimes and historically been on an individual basis. There's an exemption for professional services contracts. So that's when we start talking about the barber, the hairdresser, those types of relationships and business arrangements that have been in existence for a long time that want to continue doing so. There's an exclusion for marketing, for an administrator of human resources. But these exclusions are not as specific in particular as for example, the licensed physician. And those of us who might fall within one of these exceptions should talk to legal counsel to make sure that they indeed do fall under one of the exclusions so they know that they're following the appropriate test.

So to that point, the AB5 has some exemptions in it that are clear. But the court pointed out that the ABC test doesn't apply to everybody. So didn't they use the example of a licensed plumber is not going to be considered an employee, they are an independent contractor. So there's. Even without having a specific exemption, the court gave you some guidance on that, didn't they?

They did, the Court did. However, AB5 now expands and provides a little bit more breadth and depth to what the court had ruled in its decision.

What are the consequences? What if you misclassify somebody? How does this happen? How's it going to impact you?

Yeah, so misclassifying is a big deal here. It always has been. Employers and businesses have always been subject to litigation. But now with AB5 and provisions in the Labor Code, employers and businesses are definitely subject to litigation, including private Attorney General act actions. There's provisions that allow the city attorney and populated entities to go ahead and bring in action on behalf of the public as well. So the stakes are significantly high and it's really important for businesses to take it seriously and to properly evaluate whether their workers are indeed properly classified.

So these penalties, payroll taxes, if you make a mistake, what is risk here for the employer and why should they be? As you said, you may need to get legal counsel to make sure your workers are. If you choose to treat them as independent contractors, they are independent contractors.

Right. So as an independent contractor, the independent contractor is self reporting taxes. They're not receiving meal and rest breaks. They're not receiving overtime for the amount of hours that they worked. If a worker is misclassified and now is found to be an employee, the business that hired that worker is going to be liable for those missed meal and rest breaks for any overtime that that worker may have worked could be penalized for not carrying workers comp insurance because you don't carry workers comp insurance for your independent contractors. So all of the demerits, so to speak, add up. And it ends up being very costly.

I was just going to say. And adding onto that the tax implications too, because you're not remitting taxes on behalf the employee if they're classified as an independent contractor. And failure to do so comes along with a lot of penalties from not only the Franchise Tax Board and the Employment Development Department, but there's also individual penalties in our labor code for an employer's failure to properly remit payroll taxes.

So notwithstanding the law, Jennifer, you saw this a lot during the advocacy phase of AB5. There are a lot of workers who want to be independent contractors, correct?

Yes.

And so the employer is sometimes caught in the middle of this, right?

They are. I mean, one of the common themes that was discussed during AB5 is the ability for an independent contractor to have more flexibility than an employee. And with California's labor laws, you just cannot provide the same amount of flexibility to an employee that an independent contractor can have, which is one of the things that we heard repeatedly from those who perform work as an independent contractor, that they get to choose when they work, where they work and who they work for. And as an employee, you just don't have that same discretion.

Yeah, I have to agree. I think especially as we're seeing more and more families wanting more workplace flexibility, the independent contractor model afforded a lot of workers that ability. And unfortunately, now it's going to be less available than it used to be.

So I'm going to turn to Jennifer here for a second because we're going to tease our audience a little bit. Some of the legislators said, well, you know, you can't set your own hours as an employee. You're not as structured. Because there was a lot of complaints from people who want to be independent contractors, just like you said, Erica, who want to go to school, they want to pick up their kids, they want to go to soccer practice, they don't want to work, and so they like being an independent contractor. That was discussed in the legislature, wasn't it?

Oh, it's been discussed repeatedly in the legislature. And the flexibility that the same flexibility offered to an independent contractor has never been matched with an employee. But I'm certain that there'll be legislation addressing the flexibility issue this year.

But we're still under AB5 the laws are pretty clear. I mean, we'd like to have more flex. I think employers and employees, you know, that can I take two hours off today to go to my kid's soccer game? I'll make it up tomorrow. And it's like, well, I'd have to pay you overtime if you make it up tomorrow.

That is a flexibility that doesn't exist. That drives employers crazy and the workers crazy.

But the legislature doesn't seem to appreciate that, do they?

Not yet. They haven't yet. There's been repeated bills to try and provide that flexibility to employees to allow them on their own choice to miss their meal period if they want to leave work 30 minutes early instead of taking a 30 minute meal period during the middle of the day to be able to work 10 hours for four days a week if they choose without being paid overtime. But those bills have never progressed very far in the legislature. And so we'll see. Maybe this is an opportunity to have a new discussion on some of those issues.

So there's a. So back to Eric, both of you actually on this. You know, there's a lot of situations where, you know, you may not want to commit to a full time employee. You don't know if there's going to be enough work in the future. That isn't necessarily a consideration under AB5, is it?

No, it's not.

You still have to use the ABC test, right?

Yes, you do. That's right.

So even if it's going to be of a shorter duration and there's some workers, I mean, this is how we did get some exemptions to say I work for this, I teach music at this school for two hours and this school for two hours. I can't be an employee of everybody. But unless you get a specific exemption, there's really no parameters in there to allow for that, right?

That's pretty much correct.

Except unless the court has a discretion.

Unless the court.

Yes, the court has some discretion here, but that requires litigation, doesn't it?

And at that point you're already paying so much in legal fees and whatever might be happening with your employees, sometimes it's just too late at that point.

Well, I think that's really important because when we started this conversation about, you know, why didn't we just oppose it, you know, the only way you were going to remove yourself from the court decision's parameters was to go to court and, you know, prove that the court decision didn't apply to you. So that was really important for a lot of people to get that exemption. Right?

Jennifer, it was, it was very important.

For that certainty, for that certainty into, like you said, you can't really afford the litigation to deal with this.

Regardless of whether you're a large employer, a medium or a small employer, you're at risk for quite a bit based on the payroll taxes, the meal and rest periods, all those things. Is there any, you know, I know the federal government talked about ride sharing, you know, people that are independent contractors. Are there any confusion between federal law and state law or the state law is going to apply to most workers?

There's always confusion, especially where California is much more strict, much broader than federal law. But in this circumstance, California law is going to dictate for those businesses and workers in California.

So that's going to be the test that employers are going to have to follow, right?

Absolutely. So, for example, the IRS follows more of the Borrello type, but that really isn't going to help an employment relationship analysis under California law and under the AB5 test. So employers need to start with the test in AB5 and what AB5 says and then move to the feds and see what is more protective to the employee. Unfortunately, not the employer.

I agree. Yeah, definitely.

Well, anything that we need to add here? I mean, I think the part about depending on your business, you may need to get some legal counsel to advise you because there are quite a few factors here at risk.

Yes.

And stay tuned for next year.

Okay, good. We'll be back. Thanks for joining us at the Workplace. Please subscribe, comment and share Cow Chambers podcast by visiting cowchamber.com.