Flash Report: Governor Signs Flawed AB 5 Legislation Into Law

Gov. Gavin Newsom wasted little time in signing AB 5 into law. The bill by Lorena Gonzalez (D-San Diego) is supposed to codify the California Supreme Court’s Dynamex ABC test for differentiating between independent contractors and employees. And it sets dates for workers’ comp coverage to be provided. It makes little sense say many insurance industry experts. “How do you create an employee on one date and not require workers’ comp until another,” one asks.

In one of the ironies surrounding the bill, the law might actually apply to fewer workers than the Dynamex decision currently covers due to the numerous exemptions that some industries were able to win during the legislative deliberations. Then again, the exclusions are so badly worded as to be unclear in many instances. Many other industries, however, are expected to be up ended.

Many California business were not excluded and may have to cease operations. Included in that list are many related to the insurance industry specific field service operations such as insurance property inspectors, loss control inspectors and consultants, asset verification inspections, process servers, real estate appraisers, and interestingly both FEMA and HUD adjusters.  Catastrophe adjusters are frequently independent contractors also, – buy no more.

As a practical matter, the ABC test was already the law of the land for wage and hour issues, but this test will now apply for unemployment issues as of Jan. 1, 2020, and for workers’ comp issues as of July 1, 2020. The rule can be applied retroactively except for workers’ comp purposes.

The bill creates a presumption that a worker is an employee unless the employer can prove three things:

  1. The person 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.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Experts note that AB 5’s test is not self-implementing. “It’s going to be a situation where somebody is going to have to want to apply it,” says Mark Webb of Prop 23 Advisors.

Independent contractors who are happy with their current status and do not want to become an employee are unlikely to push for the test even if they are technically misclassified. These worksites are likely to avoid any impact until an outside enforcement agency or the employer’s workers’ comp carrier decides to push the issue.

“Whether it’s an enforcement agency like DLSE or EDD, an attorney general or a district attorney seeking to enjoin the operations of the business, whether it’s a dispute that arises out of a premium audit or whether it’s a classification dispute within the context of a claim that’s in front of the appeals board – there will have to be some kind of incident that creates this issue,” says Webb.

Organizing Targets

Others, however, especially large employers whose workers are ripe for organizing will likely feel the effects immediately upon enactment while others are already feeling it. Uber, which is standing by the independent contractor status of its drivers, is already facing a lawsuit seeking to apply the Dynamex decision to its workforce.

Similarly, the San Diego City Attorney filed a lawsuit against Instacart for allegedly misclassifying its workers. The company is a grocery delivery service that is accessed via a smartphone app.

Widely seen as a major victory for organized labor, the new law is expected to upend many industries around the state, including thousands of small businesses, franchises and owner/operators in the trucking industry.

Licensed insurance brokers, physicians and surgeons, dentists, podiatrists, psychologist, lawyers, architects, engineers, private investigators and accountants were able to secure an exemption under the bill and will continue to be subject to the multi-faceted Borello test that focuses on control. So too with registered securities dealers, investment advisors, real estate agents and direct salesmen working on commission. Other exemptions cover professional services such as marketing, graphic design and HR administration. Licensed barbers, cosmetologists, electrologists and estheticians are also exempt if they set their own rates and hours and are paid directly by the client.

The newspaper industry won a separate, one-year exemption for newspaper carriers. The exemption was included by Gonzalez in her bill AB 170 that Gov. Newsom is also expected to sign.

Whatever it is –  it is a mess. And many California businesses will have to shut down because of it.

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