On Thursday, September 12th, the California State Assembly passed Assembly Bill 5 (“AB 5”), the controversial new law that codifies the three-factor “ABC” test introduced by the California Supreme Court in its 2018 Dynamex decision. The passage of AB 5 marks a sea change in the way that companies doing business in California will be required to classify their workers.  AB 5 now goes to Governor Gavin Newsom’s desk for his signature, and Governor Newsom has previously committed to sign the bill into effect.

Effective January 1, 2020, AB 5 adopts Dynamex’s rigorous three-factor test for determining how a company may classify its workers. Under the so-called “ABC” test, which will be codified in Section 2750.3 of the California Labor Code, a worker will be considered an employee unless the company hiring the worker establishes all of the following three prongs:

(A) the worker is free from the control and direction of the company in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) the worker performs work that is outside of the “usual course” of the company’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business that is of the same nature as the type of work performed for the company.

Unlike Dynamex, which applied only to California Wage Orders (i.e., generally, minimum wage, overtime and meal and rest break liability), AB 5 is far more sweeping, and applies to California’s Wage Orders as well as the Labor Code and Unemployment Insurance Code. This means that, in the wake of AB 5, companies that are found to misclassify workers could face broader liability than they would have under Dynamex (including for unemployment insurance, various benefits, paid sick days, and state family leave).

Notably, while AB 5 specifically exempts certain industries, in its current form AB 5 does not include an specific exemption for “gig” economy companies.

To learn more about the California Supreme Court’s decision in Dynamex, listen to our podcast on The Proskauer Benefits Brief:  Legal Insight on Employee Benefits & Executive Compensation.

Please contact any member of the Proskauer Employee Benefits & Executive Compensation Group or the Proskauer Labor & Employment Group with any questions about this post.

Photo of Kate Napalkova Kate Napalkova

Kate Napalkova is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Kate advises public and private companies, private investment funds, executives and boards on a broad range of compensation and employee benefits matters. Kate’s…

Kate Napalkova is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Kate advises public and private companies, private investment funds, executives and boards on a broad range of compensation and employee benefits matters. Kate’s practice includes the compensation and employee benefits aspects of mergers and acquisitions, reorganizations, spin-offs, initial public offerings, financings and other corporate transactions. Kate’s practice further focuses on advising clients across various industries on the negotiation, structuring and implementation of benefits and compensation plans and executive compensation arrangements; golden parachutes; securities reporting, registration and disclosure compliance; and corporate governance matters.

While in law school, Kate served as the editor-in-chief of the Fordham International Law Journal.

Kate is fluent in Russian.

Photo of Katrine Magas Katrine Magas

Katrine Magas is a senior counsel in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Katrine works with public and private companies on their executive compensation arrangements and employee benefit plans both on day-to-day matters and in…

Katrine Magas is a senior counsel in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Katrine works with public and private companies on their executive compensation arrangements and employee benefit plans both on day-to-day matters and in connection with corporate transactions or financings. In her practice, Katrine provides expertise on complex tax issues arising under Internal Revenue Code Section 280G, 409A and 162(m). She also assists clients in designing, implementing and administering short- and long-term cash and equity incentive plans.

Katrine also represents individual executives related to employment, equity and separation agreements.

Before joining Proskauer, Katrine worked in Ernst & Young’s People Advisory Services, Reward group, focusing on executive compensation and global equity matters arising in financial services organizations. After graduating from law school, Katrine served as a judicial law clerk for Justice Nancy M. Saitta of the Supreme Court of Nevada.