Governor Newsom Allocates Over $21 Million to Target Misclassification of Independent Contractors

Posted: July 17, 2020 | News

   As employers continue to face great hardships in the wake of the COVID-19 pandemic, late last month California allocated $21.68 million dollars of its 2020-2021 budget to ensuring compliance with A.B. 5, the law that limits the use of independent contractors in favor of hiring employees.
A.B. 5 Refresher
A.B. 5 codified the California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court, which created a three-pronged "ABC test" for determining whether a worker is an employee or independent contractor.
Under the ABC test, a worker is presumed to be an employee unless the company proves that the worker:

  • (A) 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; and
  • (B) Performs work that is outside the usual course of the hiring entity's business; and
  • (C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The requirement that the worker perform work that is outside the usual course of the hiring company's business dramatically altered the landscape of the type of services a worker can provide to qualify as an independent contractor.
A.B. 5 provides some relief for industry-specific occupations by carving out exemptions from the application of the ABC test for those occupations. For workers included in the exempt categories, the test in effect before A.B. 5 was enacted applies. This test is referred to as the Borello test. In some instances, additional requirements imposed under A.B. 5 apply when determining a worker's independent contractor status.
A.B. 5 Enforcement 
Since taking effect on January 1, 2020, many businesses and advocacy groups have vigorously pushed for A.B. 5 to be repealed or amended to include additional exemptions. While those efforts may continue, Governor Newsom's actions indicate that California has no intention of delaying the enforcement of A.B. 5 as battles persist over its scope.
California's 2020-2021 budget provides resources to implement enforcement of A.B. 5, including $17.5 million for the Department of Industrial Relations, $3.4 million for the Employment Development Department (EDD), and $780,000 for the Department of Justice. According to Governor Newsom, these resources will allow the State to train employees on how to make determinations about employment/independent contractor status and to conduct more hearings, investigations, and litigation related to A.B. 5.
Take Away 
Now that Governor Newsom has allocated financial resources to enforce A.B. 5 by conducting more audits, prosecuting claims, and assessing penalties to employers for misclassifying workers as independent contractors, employers should reexamine their independent contractor relationships and ensure they are appropriately classified under A.B. 5.
If you have any questions or concerns regarding A.B. 5 and its application to your business, the attorneys at Ferruzzo & Ferruzzo, LLP are available to provide guidance. 

Alison C. Gibbs

Alison C. Gibbs, Esq. is a Senior Associate of the firm's Employment Practice Group.  Alison represents employers in a wide-range of employment-related litigation, including wage and hour defense, and defense of discrimination, harassment and retaliation claims.  Alison also regularly advises employers before litigation ever occurs, handling employment disputes and managing day-to-day employee issues, including reviewing employee handbooks policies, wage and hour compliance, leave issues, internal investigations, lay-offs, disciplinary action, terminations, severance negotiations, and other employment practices