In what could spark a national trend, California Gov. Gavin Newsom has signed Assembly Bill 5, dramatically changing the rules for determining when workers are considered independent contractors rather than employees. The new law provides that workers are presumed to be employees unless the hiring entity meets a three-factor test, commonly known as the ‘ABC test’.
A worker is an employee under that test unless:
A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
B: The worker performs work that is outside the usual course of the hiring entity’s business; and
C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The new law codifies the same three-part test adopted by a 2018 California Supreme Court decision (Dynamex Operations West Inc. v. Superior Court of Los Angeles). Because businesses will have to satisfy all three factors, it could be difficult to characterize most workers as independent contractors. The law will have significant tax and labor law implications for California businesses. Many businesses will face more tax withholding and reporting requirements including statutorily mandated benefits and compensation such as the state $15 minimum wage. Businesses will also have to comply with employment laws governing hiring, firing, leave and many other issues.
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AUTHORS:
Pat Carney – Partner
Lorraine Bodden – Senior Director
Eric Oscarson – Senior Director