CALIFORNIA ASSEMBLY BILL 5: REDEFINING AN “EMPLOYEE” IN THE WORKERS’ COMPENSATION ARENA AS OF JULY 1, 2020

Is your independent contractor an “employee” before the Workers’ Compensation Appeal Board (WCAB)? The answer to that question will soon be changing. California Assembly Bill 5 (AB-5) is changing the workers’ compensation community and may now include many California “gig economy” workers.

As of July 1, 2020, AB-5 will change the definition of “employee” in the workers’ compensation system.

AB-5 amends the LC §3351 definition of “employee” to include the definition of an individual who is an employee pursuant to LC §2750.3, and goes into effect on July 1, 2020 as it applies to your Workers’ Compensation litigation practice. The new law does not apply retroactively pursuant to Labor Code §3351(i).

The impact on the industry is clear. Risk managers must evaluate obtaining workers’ compensation insurance for all “employees” defined by the new Labor Code §3351 definition as of July 1, 2020. Cases currently pending, particularly cumulative traumas where the end date could be moved to after the effective date of the statute on individuals who work, need to be evaluated now before the implementation of the new definition of “employee.” Become familiar with the new definition of “employee” and its exceptions as your clients’ risk exposure can change.

LC §2750.3(a)(3) will open the door to WCAB case law on whether a broader three-part ABC test covered in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 [83 CCC 817] applies to your particular case.

The three-part test of LC §2750.3(a)(1) provides as follows:

a. 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.
b. The person performs work that is outside the usual course of the hiring entity’s business.
c. The person is customarily engaged in an independent established trade, occupation, or business of the        same nature as that involved in the work performed.

There are currently legal and political maneuvers to carve out exceptions by “gig economy” employers which may become successful in the near future. Legislative and judicial challenges are just beginning. Uber and Lyft have indicated they will seek a referendum to overturn the law, and the California Truckers’ Association has amended its complaint against various state officials to assert that AB-5 violates the Commerce and Supremacy clauses of the US Constitution, as well as the Civil Rights Act of 1871. Whether any of these actions will be successful in changing or staying the implementation of the new definition of an “employee” by July 1, 2020 is unknown.

For individuals in occupations exempt from Labor Code §2750.3, the more restrictive definition of “employee” would be evaluated under the test set forth in S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

There are extensive exceptions that have already been defined in the new law. The following are some of the exceptions to the application of the ABC test of Labor Code §2750.3(a)(1) and where the more restrictive Borello test applies which include:

  • Some Department of Insurance licensed individuals or organizations
  • Surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California pursuant to Division 2 of the Business and Professions Code, performing professional or medical services provided to or by the health care entity, including an entity organized as a sole proprietorship, partnership or professional corporation as defined in Section 13401 of the Corporations Code
  • An individual with an active license form the State of California and is practicing as a lawyer, architect, engineer, private investigator or accountant
  • Certain securities broker-dealer or investment adviser or their agents and representatives registered with the SEC or Financial Industry Regulatory Authority or Licensed by the State of California
  • Certain commercial fisherman “working on an American vessel” as defined in the code.

Additional exceptions to the ABC test are defined in LC section 2750.3(c) which identifies a contract for “professional services” would apply the Borello test under certain circumstances including: marketing, human resources administrator, travel agent services, graphic design, grant writer, fine artist, an enrolled agent licensed by US Department of Treasury to practice before IRS, payment processing agent through an independent sales organization, photographer or photojournalist who do not license content submissions to the putative employer more than 35 times per year (as further defined in the code), freelance writer, editor or newspaper cartoonist that do not provide content submissions to the putative employer for more than 35 times per year (as further defined in the code), licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist (as further defined in the code.) For a more thorough definition review LC §2750.3(c) to evaluate how it applies to your specific employee/independent contractor fact pattern.

Additional exceptions include a real estate licensee in the State of California, and a licensed repossession agency as defined. The ABC test may not apply to a bona fide business-to-business contracting relationship as defined further in the code such as a contractor and an individual performing work pursuant to a subcontract in the construction industry where the subcontractor is licensed by the California Contractors State License Board with further exceptions defined for construction truck drivers. The implementation for construction truck drivers is also time limited depending on the facts of the case.

The above provides a brief outline of the potential exclusions and review of the new law is required as it applies to your specific independent contractor case. The exceptions to the application of the ABC test are significant and depend on multiple factors including the type and manner of work performed and licensing required.

When evaluating your present defense litigation strategy, you should consider that the definition of an employee or independent contractor is more certain now than what is anticipated after July 1, 2020 and the implementation of AB-5. At that point the WCAB will begin the process of interpreting the application of the three-prong test under the Dynamex decision and whether it properly applies the multifactor Borello line of inquiry. The difference in your specific case could be significant and would depend upon the facts and interpretation of the new law.

After July 1, 2020, litigation of the definition of an employee will become more complex as to whether the standard in the ABC rule under the Dynamex decision applies. The Dynamex decision related to an Industrial Welfare Commission’s Wage Order violation, i.e., such violations include minimum wage, hours and days of work, overtime, and was not for workers’ compensation. The legislative history of AB-5 will begin to shape case law as these laws are interpreted at the WCAB and beyond.

Why the definition of “employee” is important is demonstrated in the panel decision Dennis Gray v. Pathway Group Incorporated, ADJ10520702 (8/12/2019) that provides a summary of the common law of employment and discusses the application of the Borello decision. The application in that recent panel decision was that the staffing services company was not found to be the employer. The Panel describes why the application of the Dynamex case did not apply and why the Borello standard applied.

It is to be noted that even if you are successful in proving your client is not an employer, a PEO may still be found liable in creating a contractual relationship for insurance purposes in subsequent arbitration, depending on the contract(s) involved as found in the panel decision Rodriguez v. Fairway Staffing ADJ10651475, ADJ10762532 (4/19/2019).

We can anticipate litigation on a case by case basis on the application of the three-part test versus the Borello case at the WCAB beginning July 1, 2020. The defense decision whether to proceed to litigate the definition of an “employee” now as opposed to on or after July 1, 2020 is clear. You now have the Borello factors and case law. As of July 1, 2020, the WCAB will begin to interpret the new laws and definition under AB-5 which will likely lead to the potential for risk and exposure to your clients as the case law defines further these changes to the Labor Code and whether an independent contractor is considered an “employee.”

WC DEFENSE LITIGATION TIP:

Identify cases where the definition of “employee” and independent contractor are at issue now. Consider a more aggressive litigation strategy before the changes in the law broaden the potential definition of an employee and whether your client is an “employer” under Labor Code §3351. Employers and risk management should prepare for the implementation of the new law and evaluate the necessity for workers’ compensation insurance for those independent contractors that will become covered under the new definition of “employee.”

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