California Makes Changes to Worker Classification Law

California enacted new exceptions to the worker classification provisions of A.B. 5, Laws 2019. The provisions state when a worker is an employee rather than an independent contractor for state income tax purposes.

What Does A.B. 5 Do?

A.B. 5 took effect on January 1, 2020. It codified the 3-part test established in Dynamex Operations West, Inc. v. Superior Court (also known as the “ABC test”) for determining employee or independent contractor status. Under the test, a worker is an employee, unless the worker:

• is free from the control and direction of the hiring entity in connection with performance of the work;
• performs work outside the usual course of the hiring entity’s business; and
• customarily engages in an independently established trade, occupation, or business of the same nature as the work performed.

Some occupations and business relationships are exempt from the ABC test. For these occupations and relationships, the multi-factor test set forth in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations will apply instead.

What Has Changed?

Gov. Gavin Newsom signed A.B. 2257 on September 4, 2020. It exempts workers in more occupations and business relationships from the presumption under the ABC test. This makes it easier for them to qualify as independent contractors.

A.B. 2257 also recast and clarified provisions relating to:

• the business-to-business contracting relationship;
• the relationship between a referral agency and a service provider; and
• the professional services exemption.

New Exemptions

A.B. 2257 includes new exemptions from the ABC test for workers in the following occupations, if certain requirements are met:

• sound recording;
• music and other performing arts;
• translation, copy editing, and illustration;
• real estate appraisal and home inspection;
• insurance underwriting inspection and services;
• manufactured housing sales;
• landscape architecture;
• registered professional forestry;
• master class performance;
• international exchange services;
• competition judging; and
• data aggregation.

Notably, A.B. 2257 did not include any new exemptions from the ABC test for app-based rideshare and delivery drivers.

Ballot Measure and Lawsuits

Voters at the November 3, 2020 election will get to have a say in the matter. Proposition 22 , if approved, would generally classify app-based rideshare and delivery drivers as independent contractors. They would be employees only if the company:

• unilaterally sets their hours;
• requires them to accept specific ride and delivery requests; or
• restricts them from working for other companies.

If Proposition 22 is successful, it may open the door to other initiatives to limit the application of A.B. 5.

Lawsuits, both pending and not yet filed, may also affect the scope of the law.

By Carolyn Kwock, J.D.

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