SCGA Public Affairs

AB 5 [Independent Contractors] Much Done, Much Undone, and Much More in Store for 2020

Sunday, September 22, 2019

AB 5 [Independent Contractors] Much Done, Much Undone, and Much More in Store for 2020

[Disclaimer: The following is an analysis of what transpired with respect to the California Supreme Court’s 2018 decision in the Dynamex case, the legislature’s codification of it effective January 2020 (AB 5), and what both portend for the status of the independent contractor golf professional moving forward – an analysis that given the subject matter necessarily skirts a number of legal issues; however, while what follows raises a number of legal questions (such is the nature of any discussion involving court decisions and legislation), it does NOT constitute a legal opinion by any measure of that definition.]

After six sets of amendments, a lot of shouting, street demonstrations, threats of $90 million voter initiatives, and expressions of serious doubts from dozens of legislators who voted in the affirmative, AB 5 was passed by both houses of the legislature and signed by the Governor last week. It becomes the law of the State of California January 1, 2020.

Anyone who thinks the shouting (and amending) is over just wasn’t paying attention as the Senate in particular debated or more accurately agonized over the need to use the last possible moment of the 2019 legislative session to pass into law something most considered seriously flawed and in need of immediate legislative redress when the legislature reconvenes in January 2020. Anyone who thinks that Governor Newsom was particularly happy about signing a bill he too considered flawed and woefully unfinished just wasn’t paying attention to his sidebar efforts to effectuate a compromise between the state’s huge tech industry and the state’s substantial organized labor community with respect to the need to balance the demands of modernity with the compulsion to address a worker misclassification problem run amuck. In both cases – legislature and Governor – the California Supreme Court rendered moot tools they normally would have had in their pockets to take the time necessary to finish a complicated job – a 2-year or shelved bill in the case of the legislature and a veto in the case of the Governor. Failure to act would have left the Court’s Dynamex Decision as the law on the subject of independent contracting, and as flawed and unfinished as AB 5 might be, it is far preferable to Dynamex.

Anyone who thinks that finding the sweet spot between the protection of misclassified workers and the accommodation of bona fide independent contracting in the world’s 5th largest economy constituted a simple proposition didn’t hear the apology that Senate Pro Tem Toni Atkins (D-San Diego) gave to her colleagues and a watching world immediately after her body’s approval of AB 5. She said something like the following: We had no clue just how complicated this would be when we took it up on the first day of the 2019 session, but we had no choice given the need to do something to clarify matters after the Supreme Court issued an overly broad test in Dynamex; we will tie up loose ends and finish the job in 2020.

We open with this prologue to emphasize two important things as we pick up the pieces and move forward: 1) AB 5 leaves the status of the independent contracting teaching professional in far better and more defensible shape than Dynamex, which will continue to be the law of the state through December 31, 2019; and 2) to the degree to which additional tweaks to AB 5’s provision for a “business to business for professional services” exception to Dynamex are needed to perfect it for the purpose of continuing the standard practice of making quality golf teaching available at public golf courses, the California golf industry, in large part due to the progress we made in 2019 re AB 5 and with AB 5’s author, is well positioned to secure that perfected language now that the process promises to be more about finishing a job all, including AB 5 author Lorena Gonzalez, consider unfinished than a demonstration of a left leaning political majority’s passion for calling a firm halt to a long trend of reclassifying workers as independent contractors for what they believe are reasons entirely of wage, benefits, and tax avoidance.

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Summary of Provisions / Basic Background

In Section One of the bill, there are a number of statements of legislative intent that are not codified. The purpose of these “findings and declarations” is to set forth the Legislature’s intent to codify the Dynamex ruling and to clarify its application to specific circumstances. First, the bill codifies the Dynamex decision to reiterate California’s longtime default position that provides that a person providing labor or services for payment shall be considered an employee, rather than an independent contractor, unless the hiring entity demonstrates that there is no violation of any prongs of the ABC Test.

The ABC Test in Dynamex provides that a person can only be an independent contractor if all three of the following prongs are met: 1) The person is free from the control and direction of the hiring entity in connection with the performance of the work, 2) the person performs work that is outside the usual course of the hiring entity’s business, and 3) the person is customarily engaged in an independently established trade, occupation or business.

Then the bill states that, notwithstanding this ABC Test, any statutory exception from employment status or any extension of employer status or liability remains in effect and that, if a court rules that the 3-part test cannot be applied, then the determination of employee or independent contractor status shall be governed by the test adopted in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).

Thereafter, AB 5 sets forth more than thirty exemptions from the ABC Test. The bill exempts specified occupations from the application of Dynamex and instead provides that these specified occupations are governed by the Borello multi-factor test for determining the proper classification of workers.

These exempt occupations include, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services with another business entity, or pursuant to a subcontract in the construction industry.

A new provision of the bill, in the last set of amendments, authorizes an action for injunctive relief to prevent employee misclassification to be brought by the Attorney General and specified local prosecuting agencies (cities and/or counties with populations that exceed 700,000).

AB 5 also recasts the definition of “employee” for purposes of unemployment insurance provisions to include an individual providing labor or services for remuneration who has the status of an employee rather than an independent contractor, unless the hiring entity demonstrates that the individual meets all of the specified conditions, including that the individual performs work that is outside the usual course of the hiring entity’s business.

Of final note the bill provides that the bill’s provisions do not permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to the bill’s enactment.

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Business to Business for Professional Services Exemption

The bolded underlined language in the summary of the bill above (“Business to business for professional services exemption”) is the provision of AB 5 as signed into law by the Governor effective January 1, 2020 that captures the relationship between a public golf course and a “bona fide” independent contracting teaching professional for the purpose of determining whether Dynamex as now codified, clarified and limited by AB 5 holds that this “relationship” makes him/her an independent contractor or employee – a codification further “clarified” as to scope and meaning by the official Letter to the Journal that AB 5 author Lorena Gonzalez filed in conjunction with it. (Letter with key sections highlighted follows text of “Exemption.”)

Text of “Business to Business for Professional Services” Exemption

Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:

(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:

(A) 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.

(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

(C) The contract with the business service provider is in writing.

(D) 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.

(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.

(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

(G) 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.

(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar 22 services.

(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.

(J) The business service provider can negotiate its own rates, provided that the rate is equal to or greater than two times the minimum wage for hours worked.

(K) The business service provider can set its own hours and location of work.

(L) 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 Section 7000 and following Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

We have highlighted the three (3) sections of the Exemption language that pose problems for the normative teaching professional model. The second of them (E) is handled in other sections of the Act that outline exceptions, exemptions, etc. – to wit, the following from the immediately preceding section concerning “Professional Services” – “The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing in this subdivision prohibits an individual from choosing to perform services at the location of the hiring entity. No doubt those teaching professionals who teach per contracts that define them as independent contractors maintain a business license that identifies their residence as their place of business.

The third of the highlighted sections (I) raises questions about what precisely constitutes a “tool” or “equipment” for the purposes of the Act; “vehicles” are not applicable to the teaching/driving range experience. Does the purchase of the range balls, as is the practice in the City of Los Angeles where independent teaching professionals rent space on that city’s driving ranges for a fixed monthly fee, satisfy the requirement that the business provider provide its own tools? According to the Los Angeles City Attorney, apparently yes. Does the mat or grass upon which the student strikes those golf balls constitute “equipment,” and if that is the case, does the renting of it as part of a written agreement satisfy the requirement that the business provider provides its own equipment? If not, does this mean that the identical rental relationship per written agreement between the state’s various municipalities and the companies that manage their golf courses render these management companies “employees” of the municipalities as opposed to tenants for the purposes of AB 5? That’s a rhetorical question.

The first of the highlighted sections is much more problematic. Given the infinitesimal percentage of income to a golf facility represented by the standard independent contracting agreement, the provision of golf instruction in the standard independent model is mostly an amenity to the golf facility, in this case the “contracting business.” As true as that is and as provable as it is by the most cursory of looks at a standard facility’s business records, there is still considerable bleed between the customers of one and the customers of the other. Indeed, the relationship is as much symbiotic as it is independent. It’s what makes quality teaching at public golf courses that would otherwise not be available, routinely available – an availability that benefits both facility (all good under the language of the exemption) and the customers thereof (not entirely good under the language of the exemption).

Of course, to parallel an argument that Uber has indicated it is going to invoke come January 1 when it does not reclassify the users of its app as employees, the normative public golf course really isn’t in the business of teaching golf if revenue flows are a reliable indicator of what a public golf course’s “usual course of business is.” Uber’s case is woefully weak; it has no business without moving persons from point A to point B. However, public golf courses have an incredibly robust business without teaching the game at their facilities. No doubt all of you are wincing at that comment. Surely, such would be long-term ill wisdom, and surely, such would be bad for the game in the long run. But these issues are not issues of long-term business wisdom, but rather whether certain business arrangements are better suited to employee status, the overwhelming default position of the California golf industry, or independent contracting, the overwhelmingly better mechanism for facilities, the industry, the game, and perhaps most importantly for the purposes of a law that aims to protect the interests of workers, those who teach the game of golf.

While the “legislative intent” that introduces AB 5 is not codified and thus has little dispositive value, the Letter to the Journal that author Lorena Gonzalez filed does have probative as well as some limited dispositive value. Here is the full text. When reading it please remember that the author of it and the legislation it further clarifies stated in an interview with the Los Angeles Times that it is her belief that nothing in the bill affects independent contracting teaching professionals (she called them “golf tutors” in the interview).

Letter to the Journal from AB 5 Author Lorena Gonzalez

I am writing to clarify the intent of AB 5. The fundamental purpose of AB 5 is to codify the California Supreme Court’s unanimous decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex) and clarify the decision’s application in state law. Additionally, AB 5 provides that, for specified occupations and situations, the applicable test for determining if an individual is an employee or an independent contractor is the test set forth in the California Supreme Court decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello) or relevant statute.

It is not the intent of AB 5 to distinguish between “platform” and “brick and mortar” businesses. Both types of businesses rely on individuals to perform work as part of the usual course of business.

One of the provisions of AB 5 addresses business-to-business contracting. Specifically, Subdivision (e) of Section 2750.3 provides that the holding in Dynamex and subdivision (a) of Section 2750.3 do not apply to a bona fide business-to-business contracting relationship if certain criteria are satisfied and, instead the determination of employee or independent contractor status of the business services provider is governed by Borello. Importantly, while this provision exempts certain bona fide business-to-business contracting relationships from the holding in Dynamex if the criteria are satisfied, subdivision (e) is not intended to suggest, by negative implication, that the business service provider is necessarily an employee if those criteria are not satisfied.

Additionally, AB 5 is not intended to replace, alter, or change joint employer liability between two businesses. AB 5 is focused upon the determination whether an individual is an employee or an independent contractor.

It is the intent of AB 5 that subdivision (a) of the bill and the holding in Dynamex do not apply to a physician and surgeon, dentist, podiatrist, psychologist or veterinarian (Licensees), but that the holding in Borello applies to the Licensees. The September 6, 2019 amendments to AB 5 include language in Section 2750.3(b) 92) stating that Dynamex shall apply to Licensees in some limited instances. The intent of AB 5 is to apply Dynamex to current or potential collective bargaining agreements in settings that allow for the employment of these licensees. The version of AB 5 amended September 6, 2019 has language in Section 2750.3(b)(2) that fails to capture the intent of the author due to a drafting error and erroneously applies Dynamex to employment settings and not collective bargaining agreements. The language as of September 6, 2019 is not accurate. It is my intent to fix this drafting error by introducing a bill to amend Labor Code Section 2750.3(b) (2).

In an effort to provide as much certainty as possible moving forward, I am committed to working collaboratively with the labor and business communities to develop additional language regarding the applicability of Dynamex in 2020 and to pursue legislation that further clarifies the law.

Thank you for this opportunity to clarify the intent of AB 5.

Lorena Gonzalez
Assemblywoman, 80th District

The first bolded section makes clear that in circumstances such as those presented by the teaching golf professional where there is one plank out of many that doesn’t perfectly fit those circumstances, that does not necessarily mean that such service providers are employees – at least that is the clear opinion of the law’s author as directly stated in a formal Letter to the Journal. By the way, while that is not the precise language the golf industry presented to that Office per the Assemblywoman’s request, it is the language the California golf community did ask be “clarified” in the Letter.

Taken together the actual bill language and the Journal Letter further clarifying its intent and meaning solidify the status of the contracting teaching professional as independent contractor to a much greater degree than the situation the industry faced upon the issuance of Dynamex 17 months ago. Whether “to a much greater degree” is a degree great enough to tide the industry over the year it will take to secure the same measure of full relief that is also necessary for independent truckers, musicians, artists, certain types of writers, and myriad others is a judgment that owner/operators will need to make upon full consideration of the risk posed thereby in relation to the risk of losing the state’s independent teaching professionals to other states and lines of work during the interlude.

It is also important to note that the golf industry does not need the same kind of blanket occupational exemption provided surgeons, lawyers, building contractors, brokers, and insurance agents in order to preserve the role played by the independent contracting golf professional. Those golf professionals who perform other duties (any other duty for that matter) for golf courses are already categorized and treated as employees in California. This is an important distinction that many lost sight of during the long 2019 legislative session by assuming that absent the same kind of blanket occupational carve out, the independent contracting teaching professionals could not otherwise be protected under AB 5.

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Since the publication of the California Supreme Court’s decision in Dynamex there have been thousands of lawsuits filed by employees who have used the three-pronged test established by the Court to seek declaratory relief cum damages for status misclassification. Not one suit has been filed against the golf industry during the tenure of a three-pronged test whose broadness most believe actually puts the golf industry in jeopardy. Come January 1 that overly broad test will be replaced by AB 5’s “Business to Business for Professional Services” exception that provides infinitely more protection for the model routinely employed by public golf facilities to provide high quality golf instruction. Ironclad protection? No; just because no one has yet used the much better opportunity provided by Dynamex unfettered and unclarified by AB 5 to make complaint or file suit does not guarantee that someone may invoke the much weaker opportunity provided by AB 5 to file suit or complaint with a public agency. And that is why the California golf community will continue to work its backside off to take Gonzalez, all those legislators and the Governor up on their pledges to keep working to perfect the language of AB 5 for the mutual benefit of misclassified workers and those bona fide independent contractors whose interests are much better served as independent contractors than employees.

Click here for a PDF copy of this analysis.

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