Three Ways to Find Out If You Are Legally an Independent Contractor or Employee
In recent months, a large number of workers in California – both classified as (1099) independent contractors and (W-2) employees – are trying to determine their employment status after the passage of AB 5 (Assembly Bill No. 5). Workers are left wondering if they are an independent contractor or employee. The new law changes
California’s wage and hour laws. The passage of AB 5 is vital to both businesses and workers because it affects how workers are paid starting in 2020.
AB 5 goes into effect on January 1, 2020. The new law intends to put an end to the widespread practice of California employers mislabeling their workers as “independent contractors” rather than employees. Misclassification of employees allows businesses to avoid paying the minimum wage, health insurance benefits, compensated sick days, and other fundamental principles of California labor laws.
Chapter 296, Section 1 of Assembly Bill No. 5, states that the misclassification of employees as independent contractors has been “a significant factor” in “the rise in income inequality” and “the erosion of the middle class.”
What Does California’s AB 5 Law Do?
In California, an independent contractor has different legal rights and obligations than an employee. The distinction between these two employment statuses has dramatic consequences for businesses and workers, which has led to many employers exploiting workers by misclassifying them as independent contractors.
In fact, according to The Los Angeles Times, the hiring of independent contractors rather than employees has “exploded” in recent years. A 2016 study cited in the article estimated that more than 8% of the U.S. workforce were deemed independent contractors (that’s more than 12.5 million people).
When California’s Governor Gavin Newsom signed AB 5 into law, and it becomes effective, the practice of misclassifying employees as independent contractors will likely end once and for all. This law intends to provide workers with rights, benefits, and protections by strengthening California labor laws and preventing many employers from incorrectly classifying employees as independent contractors.
The 3-Part ABC Test Determining Your Employment Status
Despite the criticism, AB 5 incorporates a three-part test, commonly referred to as the ABC test, into California labor laws. The California Supreme Court’s landmark decision in Dynamex Operations West, Inc. v. the Superior Court of Los Angeles County established the ABC test.
In April 2018, the California Supreme Court in Dynamex outlined the three-step process to decide whether an individual is an employee or an independent contractor.
Under the three-part ABC test, employers must classify workers as employees under California employment laws, unless the employer proves:
- The worker is free from the hirer’s direction and control regarding their performance, under contract and in reality;
- The worker performs work that is outside the usual course of the hirer’s business; and
- The worker is typically involved in an independently established business, trade, or occupation of the same kind as the work done for the hirer.
Speak with an experienced employment attorney to determine how AB 5 affects you. The new law affects California wage and hour laws by changing how it applies to workers’ rights and protections going forward.
How will AB 5 affect California workers and wage and hour laws?
Ghuman Law Firm, a Los Angeles-based employment law firm, founded by employment attorney Pinky Ghuman, commends the passage of AB 5. The law now gives misclassified workers the benefits awarded to all employees, such as unemployment insurance, health care insurance, paid parental leave, overtime pay, workers’ compensation, and at least a guaranteed hourly minimum wage of $12.00.
The new law provides greater protections to misclassified employees than independent contractors under California labor laws. Individuals, who prefer to have the freedom to accept assignments, tasks, or work as they please, may be required to be employees under AB 5 even if these individuals would instead give up the benefits and rights provided to employees.
California’s AB 5 in 2020: Applicability, Exemptions, and Questions
Since the Dynamex ruling in April 2018, employers are unsure of many aspects of AB 5 and the standard outlined in the Dynamex decision because relevant case law is frequently evolving.
Thus, the applicability, retroactivity, legality, and other aspects of AB 5 may change as businesses challenge the new law. Ghuman Law Firm, a Los Angeles employment law firm, predicts many industries will dispute the validity of AB 5, based on state and federal laws. Many opponents of AB 5 may argue that the law is ambiguous as it relates to California’s employment laws.
According to Section 2 of AB 5, the new change to California wage and hour laws does not apply to the following categories of workers:
- Private investigators
- Financial and investment advisers
- Real estate agents
- Travel agents
- Graphic designers
- Grant writers
- Fine artists
- Hairstylists, makeup artists and other beauty specialists who rent booths at salons
- Certain photographers or photojournalists
- Individual freelance writers and editors
AB 5 does not apply to these occupations and several other jobs. The standard established by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations governs these workers. The Court in Borello ruled a business’s right to control work details is the primary factor, along with secondary factors, to decide if a worker is an employee or an independent contractor.
Since AB 5 does not determine the legal classification of every worker, businesses and workers need to hire a wage and hour attorney due to the overlapping complexities of the ABC test with existing labor statutes, regulations, and rulings to find out whether an individual is an employee or independent contractor. Thus, this law impacts how a worker is paid, and the rights and privileges a worker is entitled to receive.
Criticism Surrounding AB 5
Not everyone is thrilled about the new law. On September 23, Los Angeles Times columnist George Skelton wrote that there are “tens of thousands of independent contractors” in California who “don’t feel the slightest bit exploited.” Skelton went on to add that these workers don’t want anything to do with “formal employment or unions.”
Furthermore, according to The Los Angeles Times, lawmakers are trying to figure out how AB 5 would work for Uber and Lyft drivers in Los Angeles and throughout California.
Our analysis indicates that while some Californians oppose AB 5 because it limits some workers’ freedom and the right to be freelancers, self-employed, and autonomous. We conclude the passage of AB 5 is a victory for California’s economy. It protects California workers, which are the state’s greatest assets.
Trucking Industry Lawsuit
The interstate trucking industry that relies heavily on owner-operators to conduct business is actively taking on the new California labor law. On November 12, 2019, California Trucking Association and two owner-operator truck drivers amended its Federal lawsuit filed in the U.S. District Court’s Southern District. The lawsuit argues that AB 5 violates federal law. It argues AB 5 violates the U.S. Constitution’s Supremacy Clause, which means federal law wins when federal and state law clash. Also, it claims the new labor law violates the Constitution’s Commerce Clause, which protects the right to conduct trade across state lines. The Complaint alleges AB 5 violates federal prohibitions on state laws “related to a price, route or service of any motor carrier.”
The resolution of this lawsuit is likely to take years before it provides an answer. Whether AB 5 applies to interstate truckers is unresolved despite the guarantees politicians are making to blue-collar voters. While other industries may follow the trucking industry’s lead, no other sector has as strong of a case under the commerce clause as owner-operators in the trucking industry.
Gig Economy Spending $90 million to Fight AB 5
In efforts to change the new California labor law, Uber, Lyft, and DoorDash workers launched a new group called Protect App-Based Drivers and Services. Uber, Lyft, and Doordash fund this political action committee (PAC). Each placed $30 million into the campaign on August 30, 2019, to classify their workers as independent contractors. On October 29, 2019, the group filed a ballot initiative with the State of California. The PAC is campaigning against the ABC Test for the November 2020 election and encouraging voters to decide if their workers are independent contractors or employees. Instacart and Postmates have joined the group.
Critics of the ABC test ballot initiative argue the committee is relying on misinformation to drive its agenda to the polls in November 2020. A publication by the University of California Berkeley’s Labor Center analyzes the ballot initiative. The report concludes the initiative has multiple loopholes that will leave many workers receiving only $5.64 an hour. Workers will make less than the California minimum wage of $13 an hour in 2020. The loopholes include, but not limited to, 1) driver waiting time is not considered work time, 2) drivers are not reimbursed for the costs of driving while waiting for a ride, and 3) driver is left paying payroll taxes, typically divided among employers and employees.
Personal experiences, economic data, and financial interests will determine the direction of California’s labor laws. Unfortunately, some workers might have to wait a year or more to find out if they are an independent contractor or employee.
If you would like to know how California’s AB 5 will affect you as a business owner or worker, you should discuss your particular case with a wage and hour attorney.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Ghuman Law Firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other applicable licensing jurisdiction.
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Pinky Ghuman, Principal Attorney at Ghuman Law Firm, has been selected to the 2020 Southern California Rising Stars list. Each year, no more than 2.5
A temporary restraining order preventing California from enforcing AB 51 will remain in effect until January 31, 2020. The temporary restraining order has been amended to limit its application only to arbitration agreements covered by the Federal Arbitration Act.
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