30 December 2019
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Hotel Lawyer with labor & employment law update for 2020
Several new pieces of California legislation will take effect on the first day of the new year, impacting nearly all employers and how they handle worker classification, discrimination disputes, arbitration agreements, and union organizing. Our round-up will help you determine which key issues may impact you in 2020; contact us to be sure you’re ready for all these upcoming changes.
Use of Independent Contractors Severely Limited as of New Year
On September 18, 2019, California Governor Gavin Newsom signed AB 5 into law, codifying the holding in Dynamex Operations West, Inc. v. Superior Court which severely curtailed when employers may use independent contractors. AB 5 is effective January 1, 2020 and sets forth an “ABC” tests to determine whether workers qualify as independent contractors.
The test examines whether:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
- The worker performs work that is outside the usual course of the hiring entity’s business
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed
The “B” prong is new, and may be particularly problematic for businesses – potentially resulting in misclassification of individuals who were formerly properly classified as independent contractors.
AB 5 codifies a number of exceptions from the ABC test, including but not limited to:
- A person or organization licensed by the Department of Insurance;
- California licensed physician, surgeon, dentist, podiatrist, psychologist, or veterinarian;
- California licensed lawyer, architect, engineer, private investigator, or accountant;
- Securities broker-dealer or investment adviser or their agents and representatives registered with the SEC or FINRA or licensed by California;
- Direct sales salespeople;
- Commercial fishermen.
Workers in these categories are subject to the “Economic Realities” test set forth in Borello & Sons, Inc. v. Dept. of Industrial Relations. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control, or the right to control, the worker both as to the work done and the manner and means in which it is performed.
AB 5 also provides for limited exemptions to the ABC test for certain professional services, business-to-business contracts, construction subcontracts, relationships between referral agencies and service providers, and contracts between motor clubs and third parties. When these categories of relationships qualify, they are subject to Borello’s economic realities test.
What this means for you: All businesses using independent contractors should conduct audits and review written independent contracts under the new standards to ensure that workers are properly classified. Misclassification can result in significant penalties, wage and hour liability, EDD and other tax liabilities as well as trigger class action lawsuits.