Dynamex decision / AB 5 / Codification of “ABC Test”

October 7, 2019

On September 18, 2019, Governor Newsom signed into law Assembly Bill 5 (AB 5), which codifies a test laid out by the California Supreme Court to determine whether a worker is an employee or an independent contractor.  The “ABC Test,” as it is known, promises to fundamentally change the existing “gig” economy, especially for companies like Uber and Lyft.

The ABC Test was set forth in the California Supreme Court’s 2018 ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.  Dynamex, a national same-day courier service, had claimed that its drivers were independent contractors as a presumed cost-saving measure.  Dynamex drivers filed a class-action lawsuit, claiming that Dynamex’s designation violated sections of the California Labor Code and California’s Wage Order No. 9, which governs the transportation industry.  During the suit, Dynamex filed a writ petition with the Second District Court of Appeal, objecting to the trial court’s use of three separate and distinct definitions of “employ.”  These included (1) to exercise control over the hours, wages, or workings conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship. Dynamex argued that the second and third definitions should not apply.  Specifically, Dynamex objected to “suffer or permit to work,” which it claimed only applied to a joint employer context and not to classification of workers.  

The Court of Appeal rejected Dynamex’s argument.  The California Supreme Court ultimately granted review to clarify the standard for classifying workers.  It determined that any of the three definitions could be applied to classifying whether a worker was an employee or independent contractor.  In place of “suffer or permit to work,” the Supreme Court developed the ABC Test.  Under the ABC Test, a worker was presumed to be an employee unless the employer could establish each of the following:

(A)  that 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;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and,

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

AB 5 Codifies the ABC Test

The California legislature then moved to codify and expand the ABC Test through AB 5.  The 6,700-word bill was passed by the Assembly 56 to 15 and the Senate 29 to 11 before being signed by Governor Newsom.

AB 5 adds Section 2750.3 to the California Labor Code, which contains the language of the ABC Test in subsection (a)(1).  Section 2750.3(a)(3) states that if a court rules that the three-part test does not apply to a specific context, whether a worker is an employee or independent contractor will be determined by the 11-part test laid out in the California Supreme Court case S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.  

Sections 2750(b) through (h) list the exceptions to the ABC Test.  For example, the ABC Test does not apply to doctors, dentists, lawyers, architects, engineers, investigators, and accountants.  Whether a worker in these professions is an employee or an independent contractor will be determined by the test in Borello.  

At the same time, the law enables cities to sue companies that violate California labor laws, whereas before they could not.  Section 2750.3(j) states that “[i]n addition to any other remedies available, an action for injunctive relief to prevent the continued misclassification of employees as independent contractors may be prosecuted against the putative employer in a court of competent jurisdiction by the Attorney General or by a city attorney of a city having a population in excess of 750,000, or by a city attorney in a city and county or, with the consent of the district attorney, by a city prosecutor in a city having a full-time city prosecutor in the name of the people of the State of California upon their own complaint or upon the complaint of a board, officer, person, corporation, or association.”

Left out of the list of exceptions in Section 2750.3(b) through (h) were “gig” economy jobs such as driver for companies such as Uber or Lyft.

Several of AB 5’s supporters hoped to send a message to companies that, as they claim, pass a company's costs of employment onto the California taxpayer.  Independent contractors are presently not covered by workers compensation, minimum wage, overtime, and/or employment discrimination laws.

Uber and Lyft have responded to the ABC Test by insisting that, under the new test, their drivers would remain independent contractors.  They argue that drivers working for Uber and Lyft are working outside the companies’ usual course of business, which is serving as a technology platform for several different types of digital marketplaces.  Therefore, in their view, Uber and Lyft are primarily technology companies, not transportation companies.

In the meantime, Uber and Lyft have stated their intention to fund a ballot initiative for the 2020 election that would overturn AB 5 and create a new category for ride-hail drivers such as those who presently work for Uber and Lyft.