California Passes Bill Imposing Strict Limitations on Independent Contractor Status

September 13, 2019

Governor Newsom (D) is expected to sign a bill (AB 5) that will codify the state Supreme Court’s strict three-part "ABC" test for determining independent contractor status while containing several exemptions for certain key occupations.

Under the state Supreme Court’s 2018 Dynamex decision and AB 5, a person is considered an employee under the state’s wage orders unless an employer can show the workers perform work that is outside the employer's usual course of business, along with two other traditional factors.

Notably, AB 5 includes exemptions from the new ABC test for certain workers:

  • For doctors, dentists, lawyers, engineers, accountants, securities broker-dealers or investment advisers, direct sales salespersons, certain marketing workers, and certain human resource administrators, the state’s pre-Dynamex test is to be used.

  • For workers performing "professional services" under a contract, all of the factors in a stringent 12-factor test must be met.

Four states broadly use an “ABC” test for their wage and hour laws: California, New Jersey, Massachusetts, and Connecticut.

AB 5 already having an impact: Mere hours after California lawmakers sent Gov. Newsom the bill the sign, a California-based Uber driver hit the ride-share company with a proposed class action alleging Uber cannot prove that its drivers are independent contractors under the ABC test. 

Takeaway:  The new law, which takes effect January 1, 2020, has drawn a great deal of attention because of its potential impact on the gig economy.  However, it will significantly impact all businesses that rely heavily on independent contractors, and there may be another attempt in the 2020 legislative session to add more exemptions.  Moreover, a number of gig economy companies have pledged a combined $90 million to campaign for a 2020 ballot initiative that would make other changes to the bill.  California won’t be the last state to enact an ABC test, however.