California Restricts Classification of Workers as Independent Contractors

A new law in California has the effect of requiring employers to consider workers previously classified as independent contractors as employees.

California AB 5, signed into law on September 18, 2019, adopts a three-factor test for determining whether a worker is an independent contractor or an employee that will likely result in many additional workers being treated as employees. The law is aimed at gig economy companies such as Uber and Lyft, but will sweep in many others, including potentially some in the mobility industry.

The new law codifies a three-part test adopted by the California Supreme Court in 2018 in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903. (See http://s3.amazonaws.com/cdn.orrick.com/files/S222732.PDF.) That approach is viewed as significantly more restrictive as to independent contractor classification than is the typically applied 20-factor federal test.  Under the new test, a worker will be considered an employee “unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation or business.”

Under the law, many more workers will be treated as employees, with all of the additional employer responsibilities that entails, such as wage withholding, employment taxes, and application of laws relating to unemployment and other employee benefits.  The workers themselves will lose some deductions that are available to independent contractors but not employees (such as the home office deduction).

Although the law directly affects only classification of workers for California purposes, it is likely that some employers may find it easier to apply the same standard for federal purposes.

The law does include a number of businesses to which it does not apply.  These include licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisors, direct sales salespersons, real estate licensees, and others.

In the mobility industry, there are a number of types of workers whose classification often gives rise to issues.  These include drivers and workers in the moving and storage industry, and workers providing support services to transferees such as career and spouse counseling, cultural training, and destination services. 

Drivers in the moving and storage industry have for some years enjoyed the benefit of a “Market Segment Understanding” negotiated with the IRS that makes it easier to determine their classification.  (See http://www.irs.gov/pub/irs-utl/van-ops.pdf.)  However, that agreement does not extend to other moving and storage workers, such as casual labor. 

It remains to be seen how broadly the new law will be applied, and additional litigation will undoubtedly ensue. Nevertheless, it has some potentially significant effects on classification of workers in California. 

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How This Will Impact Mobility

Workers such as those noted above are now far more likely to be classified as employees in California, requiring significant changes in the way companies treat those workers.

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