In September 2019, California Governor Gavin Newsom signed a new measure (AB 5) that essentially redefines businesses classify employees and independent contractors.  The legislation, as drafted, will result in a significant number of contractors being reclassified as employees which may, in turn, potentially impact wage-and-hour requirements, legal liability and devastate corresponding business operations.

The legislation adopts an “ABC test” for purposes of determining whether a worker is an employee or a contractor..

Under the ABC test as adopted by AB 5, any person providing labor or services for remuneration shall be considered an employee, rather than an independent contractor, unless the “hiring entity” demonstrates that all of the following:

  • The individual is free from the control and direction of the hiring entity with respect to performance of the work. Although the contractual terms are relevant, they are not necessarily determinative;
  • The individual performs work that is not within the scope of the hiring entity’s usual business; and
  • The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the “employer.”

The second prong makes it much more difficult to establish independent contractor status.  At present, the law potentially impacts online advertisers, including those that use content providers.

Importantly, some B2B arrangements are affected.  Businesses may potentially be liable to the employees of its vendors.  Theoretically, a vendor’s employees may be able to claim they are also employees of the “contracting business” under the “ABC test.”

The California Labor Code provides, in pertinent part, for penalties for willful misclassification as an independent contractor.  It also provides that employees be reimbursed for necessary business expenses.  California’s Office of the Attorney General has already initiated legal action to reclassify independent contractors.  Additional legal enforcement actions are anticipated.

The law is the subject of legal challenges across the state.  In fact, numerous bills have been introduced in the California Assembly to amend, repeal or replace the law, including bills to exempt specific industries from the “ABC test.”  Legislation has also been introduced to fully repeal AB 5.

The law limits the “ABC test” to a certain extent, with an exempted list of workers.

Similar legislation has been introduced in numerous state legislatures, nationwide.

Takeaway:  Businesses that may be impacted by the California law and its “ABC test” should, without limitation, identify contractors that may need to be reclassified, assess surrounding facts relating to work performed, analyze relationships with vendors, restructure working relationships, and consider whether limiting California-based activities is necessary and/or desirable.

Richard B. Newman is an FTC defense lawyer at Hinch Newman LLP.  Follow FTC attorney on Twitter @FTC defense lawyer.

Informational purposes only. Not legal advice. May be considered attorney advertising.