The Dynamex Test – A Never Ending Nightmare For California Businesses

Posted in: Employment Law by Mark Kruthers on

While the Dynamex decision and the “ABC Test” it created has been a concern for businesses (including those that operate as independent contractors) since 2018, employers found solace in the fact that the California Supreme Court took steps to limit the impact of its decision by focusing on various things specific to the Dynamex case.  As a result, for a significant period of time certain state agencies made it clear that the pre-Dynamex analysis would be used in investigations and enforcement actions.  Unfortunately, it appears that new California legislation will soon step in to tip the scales against employers.

Earlier this week the California State Legislature passed Assembly Bill 5 (“AB 5”) which attempts to codify the Dynamex decision and make the “ABC Test” applicable in all but a limited number of employment relationships.  The bill passed the Assembly by a 61 – 16 vote.  After various amendments to the bill are approved, AB 5 will move to Governor Gavin Newsom’s desk where he is expected to sign the bill into law.  If signed by Governor Newsom, AB 5 will become effective on January 1, 2020.

As a result of hard-fought lobbying efforts, AB 5 contains exemptions for relationships in certain industries.  For example, AB 5 contains a “bona fide business-to-business contracting relationship” exemption for business entities operating as “business service providers” so long as various criteria are met.  A similar exemption applies to the relationship between a “referral agency and a service provider.”  There are also exemptions for a number of specific occupations including, but not limited to: physicians and surgeons; architects; engineers; accountants; lawyers; private investigators; securities brokers-dealers, investment advisers; commercial fisherman; and direct sales salespeople.  Further, some situations where a contract for “professional services” exists are also exempt.  The “professional services” exemption could be used to cover certain types of human resource professionals, photographers, licensed barbers/cosmetologists, real estate licensees, bona fide subcontractors in the construction industry, etc.  However, each exemption is specifically described and is only applicable if various criteria are satisfied.  Accordingly, just because a relationship appears to fall into an exemption category based on the services they provide, the relationship may not meet all of the criteria set in AB 5.

In addition, AB 5 clears up any confusion as to what test will apply in determining whether a relationship subject to a specific exemption can be considered that of an independent contractor/client.  In the event the “ABC Test” is not used, AB 5 indicates that the analysis “shall” be governed by the California Supreme Court’s 1989 decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. The Borello test focuses more on who has the right to control the worker both as to the work done and how the work is performed.

AB 5 will not only have a negative impact on California businesses, but it could also threaten service industries that many consumers use on a regular basis.  Companies such as Uber, Lyft, DoorDash, Grubhub, and others operating in what has become known as the “gig economy” could see their entire business models challenged.  Ultimately, that may lead to the loss of a number of conveniences that people in California have come to rely upon.  According to reports, Uber, Lyft, and DoorDash are hoping Governor Newsom includes an exemption for “gig economy” workers in the final version of the bill that he signs.  If not, the same reports indicate those companies are willing to dedicate millions of dollars in an attempt to have the law overturned.

We previously discussed the 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County in which the Court set forth a three-part test for determining whether someone is an employee or an independent contractor.   You can read our original May 2, 2018 E-Blast discussing the decision here and our July 24, 2019 follow-up E-Blast discussing the pending fight over the retroactive application of the decision here.

COUNSEL TO MANAGEMENT:

Many businesses have already reviewed their independent contractor relationships and made changes based on the Dynamex decision.  However, for those that have not or those that held off implementing modifications because the scope/applicability of the decision was somewhat unclear, immediate action is now required.  The above discussion of AB 5 is simply a summary of the legislation as it is currently written.  There are other types of relationships that could be considered exempt from the “ABC Test” and there are a large number of criteria that must be evaluated before a determination of exempt status can be made.  Accordingly, it is recommended that entities/individuals concerned about this issue consult with qualified and experienced legal counsel immediately.  The experts at Dowling Aaron Incorporated are available to help you navigate this complex and troubling area of the law.

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