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New California Legislation Makes it More Difficult to Classify Workers as Independent Contractors

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California Assembly Bill 5 has been branded as the killer of the gig economy. It adds to the California Labor Code a new test for deciding who is properly classified as an independent contractor. Workers will be considered employees for purposes of the Labor Code, unless the hiring entity can prove that: (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 terms of the contract and in fact; (b) the person performs work that is outside the usual course of the hiring entity’s business (this is the prong that is likely to be problematic for many “gig” companies); and (c) the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. The remedies for misclassification include damages (such as the wages a worker would have received had he/she been treated as an employee), and steep penalties.

Now is the time for employers to consider their workforce and analyze whether any independent contractors will pass this new test, and if they don’t, employers should consider taking proactive steps to re-classify them as employees. But not all hope is lost – an individual treated as an employee for purposes of AB 5 does not automatically qualify as an employee for all other purposes, including tax and employee benefits. For example, some employees under AB 5 may not qualify as “common law” employees, which is the standard used under the Internal Revenue Code and ERISA, the two federal statutes that govern most employee benefit plans. Please keep a look out for more in-depth articles from Snell & Wilmer analyzing AB 5 from an employment law and benefits perspective.