Governor Newsom has signed Assembly Bill 5 (the “Bill”) in December 2019, which drastically changes how we distinguish employees from independent contractors in the state of California. This bill has several moving parts, so to better understand how this bill will operate, this summary will highlight its key features and implications:

BIG PICTURE

  • The Bill was introduced December 3, 2018 as “An act to amend Section 3351 of, and to add Section 2750.3 to, the Labor Code, and to amend Sections 606.5 and 621 of the Unemployment Insurance Code, relating to employment, and making an appropriation therefor.” And that’s exactly what it does.  
  • The Bill has a few important dates, the earliest of which is the effective date for most of the changes: January 1, 2020;
  • The Bill implicates three parts of the California Code specifically:
    • The Labor Code, which governs wage and safety regulations for employees;
    • The Unemployment Insurance Code, which governs employer liability and insurance requirements for unemployment;
    • The regulatory framework of the Department of Industrial Relationships, namely the Industrial Welfare Commission
  • The Bill’s purpose is to codify the definition of “employee” to meet the test enumerated in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (Cal. Supreme Court 2018), while preserving the prior common law test found in SG Borello & Sons v. Department of Industrial Rel., 769 P. 2d 399 (Cal. Supreme Court 1989) in specific instances.

WHAT BUSINESSES ARE IMPACTED?

  • The objective of the Bill is to target businesses typically referred to as service providers in the “gig economy”, e.g. Uber, Lyft, DoorDash, GrubHub, Postmates and similar contracted delivery services; however, as the term “employer” is not a qualified term in the Bill, this could apply to any entity engaging an individual that does not meet the Dynamextest. This Bill may also implicate game developers who frequently outsource to independent contractors, and service providers like YouTube and Twitch that profit from user generated content. 
  • Simply put, if you routinely use consulting agreements, professional services agreements, etc. to secure products and services for your business, you should make yourself aware of this law. 
  • There are a lot of exceptions in terms of who you can hire without applying the Dynamextest; however, many of these exceptions also have exceptions, to be discussed below.

THE DYNAMEX TEST

  • To meet the definition of an independent contractor under Dynamex, and as set forth in the Bill, ALL of the following must be true:
    • “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.” This is typical in most tests determining independent contractor status and doesn’t move the need much—the more control a hiring entity has over the work you produce or services you perform, the higher the likelihood that you should be treated as an employee.
    • “The person performs work that is outside the usual course of the hiring entity’s business.” This is a red flag for independent game developers who outsource certain content for their game, as well as service providers that contract services (e.g. Uber, Lyft,) and content (e.g. YouTube and Twitch)
    • “The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” This element raises additional questions—for example, is it necessary that they “hold themselves out” as a provider of that service or trade? What if the services provided by these individuals are entirely reliant on the app or company that makes these services available?
  • Failing any one of the above results in a classification of the individual contracted as an employee. 

THE EXCEPTIONS

The Bill excludes several occupations and trades from the Dynamextest application, instead applying the Borellotest, which was the precedent in California prior to Dynamex. Exceptions include (but are not limited to, it’s a long list):

  • Occupations requiring a license are mostly excluded, including but not limited to doctors, surgeons, dentists, lawyers, securities-brokers, accountants, and architects; oddly for California, the Bill is silent on and does not seem to provide an exception for talent agents;
  • Direct sales salespeople;
  • Occupations designated as “Professional Services”, which is its own long list and includes (but again, not limited to)
    • Marketing (where creative content is developed, but may exclude ad buyer agreements);
    • HR services;
    • Travel agents;
    • Graphic design;
    • Grant writers;
    • Fine artists (this is vague);
    • Payment processors;
    • Photographers, but this “professional service” contains its OWN list of important exceptions which, in turn, implies that the Dynamex test will apply and specifically references anyone working in film, television, internet streaming, music videos, live shows, etc. 
    • Freelance writers, editors, and newspaper cartoonists (who submit less than 35 pieces a year)
  • “Business-to-Business Relationships”, which sounds promising, but in order to be treated as a B2B relationship ALL of the following must be true:
    • The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
    • The business service provider is providing services directly to the contracting business rather than to customers of the contracting business; 
    • The contract with the business service provider is in writing;
    • If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration;
    • The business service provider maintains a business location that is separate from the business or work location of the contracting business;
    • The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
    • The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
    • The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
    • The business service provider provides its own tools, vehicles, and equipment to perform the services;
    • The business service provider can negotiate its own rates;
    • Consistent with the nature of the work, the business service provider can set its own hours and location of work;
    • The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code. Note: This refers to the California construction industry specifically. 
  • Other exclusions include subcontractors and relate to specific trades and industries like construction, referral agencies, and motor clubs. 

THE BORELLOTEST

  • Unlike the “bright-line” or all-or-nothing test provided in Dynamex,Borello is a sliding scale test often referred to as the “multi-factor” or “economic realities test”. This means that the more an individual seems like an employee under some factors, the less important other factors become in the determination. In making the determination some or all of the following factors may be considered:
    • Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
    • Whether or not the work is a part of the regular business of the principal or alleged employer;
    • Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
    • The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
    • Whether the service rendered requires a special skill;
    • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
    • he alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
    • The length of time for which the services are to be performed;
    • The degree of permanence of the working relationship;
    • The method of payment, whether by time or by the job; and
    • Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
  • Note that written agreements are not dispositive in an independent contractor classification under Borelloor Dynamex.

WHAT IT ALL MEANS

  • Creative businesses like game studios, publishers, and content providers and curators will have to take a close look at their relationships with consultants and individuals operating under work for hire agreements;
  • In many cases, these individuals may be reclassified as employees;
  • This, in turn, would allow contracted individuals that under the Dynamex test are now considered employees to file wage and labor disputes with the California Employment Development Department and Labor Board. 
  • Could also open the door to class actions and other labor disputes for services like Lyft, Uber, YouTube, Twitch, etc. where individuals are providing services directly to consumers who use the application or platform;
  • May inspire certain labor organizations like SAG to open its doors to/become more involved in the live stream market.