The AB 5 Fix: Uniform Worker Classification Act

employee, independent-contractor, labor law 0

The Dynamex case will gut many industries through lawsuits over misclassifying employees as independent contractors.

How AB 5 Muddied Employees v. Independent Contractor Classification

Summary

There is a lack of clarity in the workforce marketplace and in the law as to which workers are properly classified as employees and which ones are truly independent contractors.  Confusion as to the precise definition of an independent contractor has contributed to conflicting decisions by the courts on this matter.  In addition, a worker can be subjected to various laws where he or she may be deemed an employee under one and an independent contractor under another.  This Uniform Worker Classification Act simplifies the criteria used to define independent contractors with respect to employment, and imposes objective standards by which independent contractors are to be distinguished from employees.  This Act also provides for uniformity of this state’s labor laws where the distinction between employees and independent contractors is particularly relevant.

Section 1. {Short Title.} 

This Act shall be known as the Uniform Worker Classification Act.

Section 2. {Legislative Declarations.}

The Legislature Finds:

(a)        Recent developments in the workforce marketplace, and in particular with the advent of the so-called “gig,” “entrepreneurial,” or “sharing” economy, have highlighted the uncertainty that currently exists with determining the correct classification of workers as independent contractors or employees.  The proper classification of workers as employees or independent contractors is a complex legal issue that vexes workers and businesses, as well as lawyers and the courts.

(b)        Not only are the legal standards used to differentiate employees from independent contractors generally subjective in nature, but those standards differ based on the particular law at issue.  Consequently, the same person may be classified as an employee for some purposes but as an independent contractor for other purposes.

(c)        Decisions by the appellate courts of this state have highlighted the lack of uniformity in the standards used to differentiate employees from independent contractors, as well as the elastic and subjective nature of those standards.  In Tieberg v. Unemployment Insurance Appeals Board (1970) 2 Cal.3d 943, the Supreme Court ruled, for purposes under the Unemployment Insurance Code, that control was the most important factor in determining worker classification, but that elements under the Restatement of Agency, § 220, as amended, were also to be taken into consideration.  Then, in S.G. Borello and Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, the Supreme Court held, under the Worker’s Compensation Act, that establishing worker classification involved a multi-pronged and flexible test, which included considerations under common law, the Restatement of Agency, and the Labor Code.  The Borello standards were later extended to apply to worker classification distinctions under the Labor Code as well.  See, generally, Garcia v. Border Transportation Group, LLC (2018) 28 Cal.App.5th 558.  More recently, the Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 ruled that, under the Wage Orders of this state, a three-part “A-B-C” test is to be used for evaluating worker classification.  But in Garcia, the Court of Appeal held that Dynamex’s A-B-C test only applies to Wage Order claims, and that Borello’s multi-factor teststill governed determinations of worker classification under the Labor Code.  Finally, the Court of Appeal has decided that “co-employer” status is to be determined not under the Dynamex standards but, rather, by use of criteria set forth in Martinez v. Combs (2010) 49 Cal.4th 35, with the Supreme Court denying review of that decision.  See Curry v. Equilon Enterprises, LLC (2018) 22 Cal.App.5th 772, rev. denied (July 11, 2018, No. S249179) __ Cal.5th __ [2018 Cal. LEXIS 5055]. 

(d)       These decisions, and confusion resulting from them, may cause workers to be misclassified as independent contractors who should be properly treated as employees and thereby endowed with a variety of legal protections that attach to the employer-employee relationship.  Conversely, workers who are truly independent contractors may be improperly swept within the purview of employee status under the currently existing subjective and non-uniform standards, and thereby deprived of the benefits, flexibility and freedoms that are generally understood to exist in such a relationship. 

(e)        It is in the best interests of workers, businesses, and the enforcement agencies of this state to have clear, defined, objective, and uniform standards for determining who is an employee and who is an independent contractor.  Certainty and uniformity of a worker’s classification provides businesses with a clear understanding of their compliance obligations regarding all applicable laws and workers with clarity as to their legal rights, benefits and obligations under the laws of this state, and minimizes unnecessary mistakes, risk, legal exposure, and the costs and delays associated with litigation to resolve worker classification under ill-defined and disparate standards. 

(f)        The purpose of this Act is to bring uniformity in the laws and clarity to the workforce marketplace regarding the distinction between employees and independent contractors.  By doing so, the state will ensure that workers who are indeed “employees” are properly classified as such and afforded all legal rights and protections that come with that status (particularly for those who are engaged in the sale of the principal’s goods, products, stock and/or inventory), and that workers who desire to be, and meet the standards of being, independent contractors are entitled to the benefits, flexibility, and freedoms that such a relationship provides; all of which will reduce unnecessary and costly litigation as well as confusion in the workforce marketplace, the enforcement agencies of this state, and the courts.

(g)        The laws of this state must provide appropriate due process.  With the Borello standards in place for 29 years before the ruling in Dynamex, and the Supreme Court declining to take up the question of whether the standards announced in that decision apply retroactively, it is left to the legislature to answer that question and clarify this issue.  Due process should not permit the A-B-C test of Dynamex to apply retroactively and thereby impose liability on employers who may have justifiably relied on the Borello standards before the Supreme Court’s more recent pronouncements in Dynamex.

Section 3. {Included Laws/Repealer Clause.}

The purpose of this Uniform Worker Classification Act is to bring clarity, certainty, and uniformity under the laws of this state to the classification of employees and independent contractors by imposing objective and uniform standards for making such a determination.  Consequently, the standards contained in this Act shall apply to the determination of worker classification under the following laws: all parts of the Labor Code (§ 1 et seq.), including the Labor Code Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.) and the Workers’ Compensation Act (Lab. Code, § 3201 et seq.); all Wage Orders promulgated by the Industrial Welfare Commission and/or the Department of Industrial Relations; the Business and Professional Code section 17200 et seq.; and the Unemployment Insurance Code section 100 et seq..

Section 4. {Classification of Workers as Independent Contractors and Employees.}

(a)  Subject to the provisions of subsection 4(b), a person shall be classified as an independent contractor under the laws of this state set forth in Section 3 of this Act only if:

  1. The person has either filed or is contractually required to file, in regard to the income earned from the work, an income tax return with the Internal Revenue Service and the State of California for a business or for earnings from self-employment; or
  • The person provides his or her services through a business entity, including but not limited to, a partnership, limited liability company or corporation, or through a sole proprietorship registered with a DBA as required under law; and
  • The person only provides services to customers/patrons and/or sells goods, products, stock and/or inventory that did not originate with, and are not the property of, the principal; and 
  • The person signs a written contract with the principal, in substantial compliance with the terms of this subsection, stating the principal’s intent to retain the services of the person as an independent contractor and containing acknowledgements that the person understands that he/she is:
  1. Providing services for the principal as an independent contractor;
  2. Not going to be treated as an employee of the principal;
  3. Not going to be provided by the principal with either worker’s compensation or unemployment compensation benefits;
  4. Obligated to pay all applicable federal and state income taxes on any monies earned pursuant to the contractual relationship, including any tip income (if relevant), and that the principal will not be making any tax withholdings or deductions from any payments that it issues to the person;
  5. Responsible for the supplies used, and other variable expenses that he/she incurs, in connection with performing the contracted for services, unless the expenses are reimbursed under an express provision of the contract; and
  6. Responsible to maintain and bear the costs of any business licenses, insurance, certifications or permits that may be required to perform the services; and
  7. The person satisfies five or more of the following criteria:
    1. With the exception of the exercise of control necessary to ensure compliance with statutory, regulatory, licensing, permitting, contractual or other similar obligations, or to protect persons and/or property, or to protect a franchise brand, the person has the right to control the manner and means by which the work is to be accomplished, even though he or she may not have control over the final result of the work.  This provision is satisfied even though the principal may provide orientation, information, guidance, or suggestions about the principal’s business, services, customers and operating systems, and training as may be required by law.  
    1. Except for an agreement with the principal relating to final completion or final delivery time or schedule, range of work hours, or the time entertainment is to be presented if the work contracted for is entertainment, the person has control over the amount of time personally spent providing the services.
    1. Except for services that can only be performed at specific locations, the person has control over where the services are performed.
    1. The person is not required to work exclusively for one principal unless:
  8. A law, regulation or ordinance prohibits the person from providing services to more than one principal; or
  9. A license or permit that the person is required to maintain in order to perform the work limits the person to working for only one principal at a time or requires identification of the principal.
  • The person is free to exercise independent initiative in soliciting others to purchase or otherwise use his or her services.
  • The person is free to hire employees or to contract with assistants, helpers, and/or substitutes to perform all or some of the work.
  • The person cannot be required to perform additional or other services without a new or modified contract.
  • The person obtains a license or other permission from the principal to utilize the principal’s workspace in order to perform the work for which the person was engaged.
  1. The principal has been subject to an employment audit by the Internal Revenue Service (“IRS”) and the IRS has not reclassified the person to be an employee, or has not reclassified the category of workers to which the worker belongs to be employees.

(b) All workers who do not satisfy the criteria set forth in subsection 4(a) shall be classified as employees for all purposes under the laws of this state specified in Section 3 of this Act.  Nothing contain in subsection 4(a), however, shall require a principal to classify a worker who satisfies the requisite criteria contained therein as an independent contractor; the principal always being free to retain the worker as an employee.  A worker retained as an employee shall be classified as an employee under, and be entitled to all the protections of, all laws set forth in Section 3 of this Act. 

Section 5.  {Non-retroactivity of the Dynamex Test.}

The A-B-C test adopted by the Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, shall not be applied retroactively by the agencies or courts of this state. 

Section 6.  {Supremacy of This Act.}

It is the intent of the state legislature to provide for the uniformity of laws governing the determination of a worker’s employment status.  No city, county, municipality, unincorporated community, township, or other local government entity or subdivision may pass any law, ordinance, regulation, code, charter, or other guidance in conflict with this Act.  Nothing in this Section, however, shall preclude the enforcement of any law, ordinance, regulation, code, charter, or other guidance enacted, either prior or subsequent to the adoption of this Act, by any city, county, municipality, unincorporated community, township, or other local government entity or subdivision governing the rights, protections and/or obligations of workers classified as employees under either the terms of this Act or voluntarily by a principal; this Act merely providing uniformity throughout the state for determining the work classification of legal employees and independent contractors. 

Section 7. {Severability Clause.}

If any provision of this Act, or the application thereof to any person or circumstances, is held to be unconstitutional or otherwise invalid, the remainder of this Act, and the application of its provisions to other persons and circumstances, shall not be affected thereby. 

Section 8. {Effective Date.}

This Act shall become effective _____________________.