California’s Expanded Definition of “Employee”

As of September 18, 2019, AB-5 codified the California Supreme Court’s Dynamex v. Superior Court decision in which the California Supreme Court adopted the “ABC” test for use when determining coverage under the Industrial Welfare Commission (“IWC”) Wage Orders. Under the new California law, the application of the ABC test is expanded to the entire California Labor Code. It takes effect in 2020.

According to the ABC test, the law assumes that any individual who is performing a service for someone else is an employee. The hiring individual or the one receiving the benefit of the service must prove that the worker is an independent contractor if they want to rebut the basic assumption of employment. To be successful, the “hiring” entity would need to meet each one of three different ABC test requirements:

1.    The “worker” must have freedom in connection to the performance of their job duties; the hirer must not maintain control/direction of the worker while they are on the job.

2.    The worker must perform work that falls outside of the hirer’s usual or typical business.

3.    The worker must be shown to be engaged in independent and established trade or business of the same nature as the work they are performing for the hirer.

Determining if a worker is an employee or an independent contractor carries great significance. If the worker is classified as an employee the employer bears responsibility for paying numerous taxes, providing worker’s compensation insurance, and complying with the various state and federal statutes governing employment issues like overtime pay, minimum wage, working conditions, etc. When an employee is misclassified on the job, the hirer can be sued for unpaid wages and overtime, etc.  

The second part of the ABC test is particularly troublesome for employers in the gig economy. It can be taken as a direct challenge to the fundamental business model on which the gig economy thrives. Companies will need to look to the court to determine what is and is not “outside” their usual course of business. Some companies may be able to persuade the judge to make a favorable distinction, but many fear the effect of the new law. Some companies are actively lobbying California legislators for statutory exemptions under AB-5. Occupational and industry exemptions will remain subject to traditional common law definitions of employment.

If you need more information about misclassification in the workplace and what it means to be denied an overtime wage, please get in touch with the experienced employment law attorneys at Blumenthal Nordrehaug Bhowmik DeBlouw LLP at one of their law firm offices located in San Diego, San Francisco, Sacramento, Los Angeles, Riverside and Chicago.