In recent years, employers have faced increased scrutiny regarding their classification of workers as independent contractors rather than as employees. The U.S. Department of Labor estimates that in 2017 employers classified nearly 15.5 million workers, representing 10.1% of the workforce, as independent contractors across a variety of sectors in the economy. Various federal and state laws and regulations apply only to workers classified as employees, and businesses bear the responsibility of making payroll tax withholdings and reporting those withholdings to governmental tax authorities, but not if the workers are classified as independent contractors. In response to the uptick in cases alleging misclassification of workers, courts and administrative agencies have developed or revised a series of tests to determine whether an employer has properly classified a worker as an independent contractor.

The law governing worker classification can be quite complicated, and the legislature and courts in California have now made the law even more challenging for employers. In April 2018, the California Supreme Court decided Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903 (2018) and announced the so-called “ABC test,” a legal standard for worker classification that significantly narrows an employer’s ability to classify workers as independent contractors. The court’s holding in Dynamex applied only to worker classification under California’s so-called “Wage Orders,” which set forth the state’s wage and hour rules. However, this year, the California Legislature enacted Assembly Bill 5 (AB5) which expanded the application of Dynamex’s ABC test to classification of workers under the California Unemployment Insurance and Labor Codes. Although the bill exempts more than 50 professions and businesses from the new, more rigorous, standards, employers with operations in California may need to reassess classification of workers as independent contractors to ensure compliance with AB5.