On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (AB5) into law. The bill attempts to codify the 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex).

The Dynamex case created a new California standard for evaluating independent contractor relationships, called the ABC Test. However, the decision left open many questions about how and when the ABC Test applies to independent contractor classifications, calling for additional clarification.

Here’s a review of what was rolled out in 2018—as well as the changes introduced in AB5.

The ABC Test

The ABC Test requires a hiring entity to demonstrate that all three of the following requirements are met for a worker to be properly classified as an independent contractor.

• A: The worker is free from the control and direction of the hirer 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
• C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed

The test, especially part B, creates a challenging standard for companies when evaluating the proper classification of individual service workers who are retained to provide services.

AB5 Clarifications

To ease classification and clarify questions introduced by the ABC Test, AB5 introduced the following classification changes.

Additional Exemptions

AB5 goes further in defining the application of the ABC test, providing exemptions for some licensed professionals, including physicians, dentists, lawyers, architects, engineers, accountants, and real estate agents, among others.

For professionals exempted from AB5, a less stringent standard for determining independent contractor status, known as the Borrello rules, will apply. We’ll provide additional insight about these rules and how to apply them as information becomes available.

Employee Definitions

AB5 also introduces changes to the regulatory definition of an employee to be more inclusive in finding an employee relationship with an employer. In addition, these changes expand what may be considered a crime when an employer violates these provisions. AB5 revisions apply to both the California Labor Code and the California Unemployment Insurance Code. 

Effective Dates

These provisions apply retroactively to any current claims or actions brought by workers against their former employers.

We’re Here to Help

Changes introduced by the AB5 can be challenging. If you have any questions about the revisions or their application, please reach out to your Moss Adams professional, and stay tuned for future AB5-application articles.