AB 5, Dynamex and Borello: What Standard Governs Independent Contractor Status In California?

It is no secret that independent contractor misclassification claims are being filed against employers with a great deal of frequency, often as class actions and often in California.  Many of those lawsuits have been filed against gig economy companies.  But, of course, they are not the only companies facing such claims.

As a result, many companies that classify workers as independent contractors are asking a basic question, “Are those workers properly classified?”

It sounds like such a simple question, one that should have a simple answer.

But there is no simple answer, at least not in California, where the California Supreme Court created a new “ABC” test in Dynamex, only to have the legislature follow up with a statute known as AB 5, codifying and expanding Dynamex while simultaneously excluding some occupations from its scope.

Let’s see if we can help navigate the current state of the law in California.

What is the test for independent contractor status in California?

For claims post-January 1, 2020, it’s AB 5, which we previously discussed here.

For claims pre-January 1, 2020, it could be AB 5.

Or maybe AB 5 and Dynamex.

Or maybe AB 5 and Dynamex and Borello.

Or maybe just Dynamex.

Or maybe just Borello.

It depends on what time period, claims and occupations are at issue, and whether AB 5 and Dynamex are determined to be retroactive.

Does AB 5 apply retroactively?

Maybe, maybe not.  AB 5 specifically states that some sections apply retroactively.

And to the extent AB 5 is intended to be a “clarification” of existing law, it may apply retroactively because clarifications generally apply retroactively.

But that does not mean that there are not arguments that AB 5 does not apply retroactively.  “[U]nless there is an ‘express retroactivity provision, a statute will not be applied retroactively unless it is very clear from extrinsic sources that the Legislature must have intended a retroactive application.’”  And the subdivision of AB 5 that codifies Dynamex’s “ABC” test has no express retroactivity language, while a subsequent subdivision concerning the exceptions to the “ABC” test does have such language.  That distinction is meaningful because if the “legislature carefully employs a term in one statute and deletes it from another, it must be presumed to have acted deliberately.”

What is the difference between AB 5 and Dynamex?

AB 5 has a number of exceptions that were not in Dynamex, and Dynamex’s ABC test was limited to claims arising under a California wage order.

And AB 5 extends beyond just claims relating to wage orders.  For example, AB 5 extends to claims for wrongful termination or expense reimbursement, where Dynamex did not.

What occupations are excepted from AB 5?

A number of occupations are excepted from AB 5, subject to certain conditions (including licensure or certification), including physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, private investigators, accountants, securities broker-dealers, investment advisers, and commercial fisherman.

And more exceptions may be on the way.

Does Dynamex still apply to occupations that are excepted from AB 5?

Maybe, maybe not.

For claims arising on or after January 1, 2020, Dynamex should not apply.

For the specific occupations that are excepted from the ABC test, AB 5 makes clear what the test is, and that is generally the one set forth in Borello, not Dynamex.

Assuming AB 5 is not retroactive, for claims relating to wage orders arising before January 1, 2020 but after Dynamex was issued on April 30, 2018, then Dynamex would apply for those claims – and Borello would be the test for all non-wage order claims arising before January 1, 2020.

Is Dynamex retroactive?

Maybe, maybe not.  That issue is before the California Supreme Court.

There is a good argument that Dynamex should not be retroactive because, before Dynamex, the “ABC” test had never been adopted in California courts.  For 70 years, the worker classification test focused on the right of control, which came to be known as the Borello test.  Before Dynamex, there was not a single California authority that had adopted the “ABC “test, which was taken from New Jersey and Massachusetts law.  Because the Borello test had been the law of California since 1946, California businesses reasonably relied on that standard, and decisions (like Dynamex) should apply only prospectively where the California Court of Appeal has previously consistently applied “a settled rule” different from the new one.

Is the Borello test dead?

Not at all.  It is the test generally used for the exceptions identified in AB 5.

And if AB 5 is not retroactive, then Borello would still apply to claims unrelated to wage orders, such as expense reimbursement.

Additionally, it arguably applies to the “joint employer” inquiry even if AB 5 is not retroactive.

Do AB 5 and Dynamex apply to the “joint employer” inquiry?

So far, there are two courts that have concluded AB 5 and Dynamex do not apply where one of the entities is an undisputed employer, and that they only apply to the relationship between a worker and the “hiring entity.”

But what if there is no undisputed employer and an individual performs services for two unrelated companies?

The “ABC” test in Dynamex and AB 5 arguably should not apply to any entity that does not “hire” the individual.

By way of example, assume an individual enters into a contract with Company X and performs services for Company X’s clients Companies Y and Z.  And assume that none of these companies are affiliates (i.e., they do not have common ownership).  While the plaintiffs’ bar may argue that the “ABC “test should apply to all three companies, Dynamex explained that workers are presumptively employees of “the hiring business” unless that business meets the ABC test.  And AB 5 expressly refers to “the hiring entity” in codifying the ABC test.  Because Companies Y and Z did not “hire” the individual, the ABC test should not apply to them.