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California Enacts Employment Classification Law

California passed a law that classifies independent contractors as employees unless they satisfy the requirements of a three-part test. The law also establishes exceptions.
Workers in an office discuss the new worker classification law in California.

California passed a law codifying a decision by the state’s Supreme Court that classifies independent contractors as employees unless they satisfy the requirements of a three-part (ABC) test. While this has essentially been the legal test for all workers since the Dynamex Operations West Inc. v. Superior Court decision in 2018, Gov. Gavin Newsom made it official on Sept. 18, 2019, signing Assembly Bill 5 (AB 5) that established exceptions for certain employers/workers and expanded the claims available to workers.

The law (AB 5) is effective Jan. 1, 2020.

What is the ABC Test?

The ABC test provides that, where the term “employee” is not otherwise defined, a person who provides labor or services for pay will be considered an employee — and not an independent contractor — unless the employer can prove:

  1. The person is free from the control and direction of the entity relating to the performance of the work;
  2. The person performs work outside the usual course of the hiring entity’s business; and
  3. The person is customarily engaged in an independently established trade, occupation, or business

What are the exemptions to the ABC test included in AB 5?

As enacted, AB 5 will provide exemptions to the application of the ABC test for specific industry areas, including:

  • Doctors — licensed physicians and surgeons, dentists, podiatrists, psychologists, veterinarians
  • Some licensed professionals — lawyers, architects, engineers, private investigators, and accountants
  • Financial services — licensed insurance brokers, registered securities broker-dealers, investment advisors
  • Real estate agents
  • Commercial fishermen
  • Direct salespeople, provided the salesperson’s compensation is based on actual sales, rather than wholesale purchases or referrals
  • Freelance writers and photographers, provided the worker contributes no more than 35 submissions to an outlet in a year
  • Hair stylists, barbers — defined as a licensed barber or cosmetologist, provided that person sets their own rates and schedule
  • Others performing work under a contract for professional services with another business entity, or pursuant to a subcontractor in the construction industry

The above exemptions to AB 5 will, instead, be subject to the multi-factor Borello test that was previously utilized by the state for worker classification determination.

AB 5 also states that if a court rules the ABC test cannot be applied to a certain worker status, then the determination of employee or independent contractor status should be conducted under the Borello test.

What industries will be impacted by AB 5 and aren’t listed as being exempt?

It has been predicted by interest groups and those in these industries that certain industry areas might be more significantly impacted by the enactment of AB 5 because they are not included in the listing of enumerated exceptions in the law. They include:

  • Rideshare and delivery services
  • Commercial truck drivers
  • Janitors and housekeepers
  • Health aides
  • Newspaper carriers
  • Unlicensed manicurists
  • Campaign workers

Next steps

California employers are encouraged to review their current worker classifications, in particular those workers classified as independent contractors. Paychex will continue to monitor pending legislation in other states seeking to impose the ABC test to worker classification, including a bill proposed in the New York state Legislature.

Kate Hill
Kate Hill is a compliance analyst who concentrates on the impact of legislative and regulatory changes on employment law for Paychex, Inc.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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