California Moving to Codify Strict Limitations on Independent Contractor Status

May 31, 2019

The California State Senate passed legislation that would codify the state Supreme Court’s strict three-part "ABC" test for determining independent contractor status that it established in the 2018 Dynamex decision, while containing several exemptions for certain key occupations.

Under the Dynamex ABC test and the bill (AB5), a person is considered an employee under the state’s wage orders unless the hiring entity demonstrates, in addition to traditional factors, that "the person performs work that is outside the usual course of the hiring entity’s business."

However, for workers performing "professional services" work under a contract the bill would apply a new nine factor test (all of which must be met):

  • The individual maintains a separate business location, which may include the individual’s residence;

  • The individual has a business license in addition to any required professional licenses or permits;

  • The individual has the ability to use his or her own employees to complete the work;

  • The individual has the ability to contract with other entities;

  • Both the individual and the hiring entity have the ability to negotiate compensation for the services performed;

  • Outside of project completion dates and reasonable business hours, the individual has the ability to set his or her own hours;

  • For services that do not reasonably have to be performed at a specific location, the individual can determine where to perform the services;

  • The individual is customarily engaged in the same type of work performed under the contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work; and

  • The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

“Professional services” includes occupations that require an active license from the State of California or involve the practice of law, dentistry, architecture, engineering, or accounting, or require possession of an advanced degree in the field of marketing or human resources.

For certain other occupations the pre-Dynamex test is to be used.  This includes licensed insurance agents, licensed physicians and surgeons, registered securities broker-dealers or investment advisers, a direct sales salesperson, and real estate licensees.

Workers providing hairstyling or barbering services could also be exempt if they meet certain conditions, but not drivers or other manual non-office workers.

Bad news/good news:  The bill now moves to the California Senate. The bad news is this would remove any doubts about the permanence in California of the controversial Dynamex decision that has disrupted many occupations.  The good news is the legislature recognizes this potential disruption and is seeking to carve out some of those occupations most impacted. It is unclear how many occupations will eventually be excluded from the state’s strict ABC test in the final bill.  Reportedly, many of the bill’s supporters acknowledged it needed revisions as it goes through the Senate to exempt more professions and industries.