United States: How Much Will AB 5 Really Change California Law?

Last Updated: September 20 2019
Article by Aaron H. Cole

The answer is not as much as you may think. Much of the recent media coverage of California's Assembly Bill 5 (AB 5) suggests that the bill represents a sea change in California law with respect to the classification of independent contractors.

Not quite.

Pre-AB 5: The ABC Test Has Been California's Test Since April 2018

The real sea change occurred over a year ago in April 2018, when in a significant decision the Supreme Court of California changed the state's legal test for determining whether a worker is properly classified as independent contractor rather than employee. The court replaced the Borello test, which had been in effect since 1989, with the ABC test, which the court borrowed (like a cup of sugar) from the state of Massachusetts. But the short story is that the ABC test will likely make it significantly more difficult for a worker to qualify as an independent contractor.

AB 5, if signed by Governor Gavin Newsom, will add the ABC test to the California Labor Code. But the ABC test has been the legal test in California since April 2018.

So, how might AB 5 change the legal landscape in California with respect to classifying workers as independent contractors?

AB 5 Significantly Reduces the Number of Workers Subject to the ABC Test

First, the most significant (and underreported) change under AB 5 will be to significantly reduce the number and types of workers who would otherwise be subject to the ABC test under the Supreme Court of California's 2018 decision.

As previously discussed, AB 5 exempts a long list of occupations and types of service providers from the ABC test. The old Borello test will continue to apply to these exempted workers. Without the exemptions provided by AB 5, the new test established by the Supreme Court of California would apply to every independent contractor in California, from barbers to doctors to investment advisers to manicurists.

AB 5 Expands the Claims Subject to the ABC Test

Second, AB 5 will expand the types of legal claims to which the ABC test will be applicable.

California's employers must comply with both the Labor Code and Industrial Welfare Commission's wage orders, which govern the wages, hours, and working conditions in certain industries or occupations.

On its face, the holding in the Supreme Court of California's 2018 decision limited the ABC test to claims under California's wage orders. For example, under the court's decision, the ABC test would apply to claims under the wage orders for overtime pay as well as meal and rest period premium pay by a worker who alleges misclassification as an independent contractor.

Business Expense and Waiting Time Claims

Under AB 5, the ABC test would also apply to certain claims that can only be made under the Labor Code, such as claims for reimbursement of business expenses or for waiting time penalties. Under AB 5, the ABC test would also apply to a claim for unreimbursed business expenses under the Labor Code by a worker who alleges misclassification as an independent contractor.

PAGA Claims

The most significant effect of this expansion of the test to Labor Code claims is that, under AB 5, the ABC test will apply to claims for civil penalties under the Labor Code Private Attorneys General Act (PAGA) for violations of the Labor Code and wage orders. PAGA suits represent a significant risk of exposure for California employers because they are mass litigation matters, like class actions. But, unlike class actions, PAGA actions cannot be compelled to arbitration—and the civil penalties that theoretically can be recovered under PAGA add up quickly to six and seven figures.

Pre-AB 5 Expansion of the ABC Test

However, it may be easy to overstate the significance of AB 5's expansion of the ABC test. In fact, the expansion appears to have already been underway for over a year. Just a few months after the Supreme Court of California's April 2018 decision, the Orange County Superior Court held that the ABC test applied to PAGA actions. And, in May 2019, the California Labor Commissioner's Office announced that, as a matter of enforcement policy, it would treat California Labor Code provisions that overlap with requirements under the wage orders as subject to the ABC test. This would include Labor Code claims for inaccurate wage statements, meal and rest periods, overtime, minimum wage, liquidated damages, and reimbursement of expenses.

AB 5 Authorizes Actions for Injunctive Relief by State and Local Governments

Third, AB 5 will allow the attorney general and certain city attorneys to bring civil actions for injunctive relief.

This last-minute addition to the bill on September 6, 2019, introduced some very confusing language. But on its face, this new provision appears to give the attorney general (and some city attorneys) the right to bring lawsuits seeking orders compelling the reclassification of independent contractors as employees. These government plaintiffs would have to litigate the issue of whether the workers were properly classified, just as a private individual bringing a lawsuit would do under the new ABC test. Thus, this provision might be seen as just adding another potential litigant to the list of potential plaintiffs.

However, this provision may pose a greater risk to enterprises targeted by the government than the addition of a potential plaintiff. As is regularly demonstrated, a private litigant will settle misclassification lawsuits without requiring reclassification of workers, but the government litigant, which is not responsive to the same incentives as a private litigant, may not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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