As many businesses will have potential exposure based on the retroactive effect of the new Assembly Bill (“AB”) 5, companies should take immediate action and require their independent contractors to sign arbitration agreements prior to January 1, 2020, when new California legislation AB 51, prohibiting mandatory arbitration agreements, goes into effect. Companies should also reexamine the status of any independent contractors providing services in order to address AB 5.
Many of the provisions of AB 5 may apply retroactively. As a result, an individual, who has been misclassified as an independent contractor, may initiate litigation, including class action litigation alleging wage and hour violations, based on the individual’s misclassification for the entire four year statute of limitations period. As independent contractors may not bring a class action if they have signed an arbitration agreement, we highly advise that companies have their independent contractors (and employees) immediately sign arbitration agreements to avoid class action litigation.
AB 5 may require the reclassification of your company’s independent contractors as employees. AB 5 codifies the California Supreme Court’s independent contractor ABC test in Dynamex Operations v. Superior Court. Under Dynamex, individuals who perform work within your company’s usual course of business must be classified as employees, unless they fit within one of the exemptions. AB 5 codifies a number of exemptions. Several industries and positions are not included in the exemptions, including photojournalists, who license work for motion pictures, theatrical productions, television productions, internet streaming productions, commercial productions, broadcast news, music videos, and live shows, unless they fit within another exemption. These and other positions may need to be reclassified as employees if they do not fit within one of the exemptions.
In addition, the technical requirements of AB 5 are complex and onerous. There are a limited number of exemptions under AB 5, which include:
- Contracts between subcontractors and contractors in the construction industry (subject to AB 5 limitations).
- Contracts between businesses providing services to other businesses (subject to AB 5 limitations).
Certain individuals who provide “professional services” are also exempt from the AB 5 test for employee status. The exemption applies if the services provided by the individual fall within specific categories, including the following:
- Administrator of human resources (subject to AB 5 limitations).
- Graphic design.
- Payment processing agent through an independent sales organization.
- Services provided by a still photographer or photojournalist who do not license content submissions to the putative employer more than 35 times per year. This does not include work performed on motion pictures, or projects produced for theatrical, television, internet streaming, commercial productions, broadcast news, music videos, and live shows (subject to AB 5 limitations).
- Services provided by a freelance writer, editor, or newspaper cartoonist who does not provide content submissions to the putative employer more than 35 times per year (subject to AB 5 limitations).
In addition to fitting within one of the above categories, there are added requirements for an individual who provides “professional services” to qualify for the exemption under AB 5, including the requirement that the individual obtain a business license, have the ability to set or negotiate their own rates and their own hours, customarily and regularly exercise discretion and independent judgment in the performance of the services, and customarily engage in the same type of work performed under contract with another entity or hold themselves out to other potential customers as available to perform the same type of work..
If you have questions about how to navigate the intersection of these two new laws, please contact us today.
Daniel J. O’Neil- Ortiz is a member of Hunt Ortmann’s Employment Law Group. JoLynn M. Scharrer is a shareholder at Hunt Ortmann and leads the firm’s Employment Law Group and Insurance Group. Our team is ready to undertake an immediate review of your arbitration agreement, or any other important documents to keep your business protected, including employee handbooks, employee/ independent contractor agreements, non-disclosure agreements and new employee packages. Please contact us at firstname.lastname@example.org.