On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (AB 5), a bill that will dramatically alter whether, and under what circumstances, businesses may classify workers as independent contractors rather than employees.  Two recent developments may help clarify this expansive bill’s application and scope.

Early versions of the bill seemed to conflate two distinct issues:

1. Alleged misclassification: Should a worker who is classified as an independent contractor be deemed as an employee?

2. Joint-employer status: Should more than one person or entity be deemed a joint employer of a particular employee? 

The bill’s failure to adequately separate and address these two questions baffled many businesses, particularly franchisors, as they attempted to determine what changes might be necessary to their operations in California or, indeed, whether they could continue to do business in California at all in the event the bill were signed into law.  Put simply, some employee plaintiffs have urged courts to construe the ABC test, codified in AB 5, broadly, and use it to determine whether a given company is a joint employer of another company’s employees (attempting, for example, to hold a franchisor liable as a joint employer of its franchisee’s employees, even when there was no allegation of misclassification).  Defendants, in response, have argued that the ABC test is limited to the narrower question of whether a given worker is properly classified as an independent contractor or an employee, and thus where there is no allegation of worker misclassification, the ABC test has no application.   

Several developments during the past three weeks appear to clarify that AB 5 is not intended to replace, alter, or change existing law regarding joint-employer status and is directed at the narrower misclassification question.  These developments do not mean, however, that the issue is settled, and litigation on this point will likely follow. But these new developments are instructive in determining the legislators’ intent to limit AB 5’s reach.

Eleventh-Hour Amendments

Legislators amended the bill twice during the last two weeks before the legislative session closed on September 13, 2019.  These belated amendments suggest AB 5 is limited to situations where the workers at issue are classified as independent contractors. 

On August 30, 2019, an amendment to the bill added the phrase “rather than an independent contractor” to key provisions of the bill.  For example, the critical first sentence of proposed Labor Code section 2750.3 was amended to read:

For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied¹

On September 6, 2019, the final amendment to the bill added the declaration:

… the intent of the Legislature in enacting this act to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law, including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave. …²

These amendments reflect that legislators apparently intended the bill to focus on a narrow issue:  the alleged misclassification of workers as independent contractors.  Parenthetically, this accords with the policy concerns about misclassification that have animated the AB 5 debate:  namely, that when workers are misclassified as “contractors,” they lack certain basic workplace protections.  If, however, there is no alleged misclassification (that is, the workers are properly classified as the employees of one company), they are already receiving the “basic rights and protections” of that status, AB 5’s purpose is served, and the law should not extend to determining whether they are employees of an unrelated company.

Assemblymember Gonzalez’s Letter

This interpretation was further borne out in legislative history provided to the Assembly after passage of the bill.  On September 13, 2019, Assemblymember Lorena Gonzalez, chief sponsor of AB 5, published a letter to the California Assembly’s daily journal.³ 

The letter contains the following statement regarding misclassification versus joint-employer status:

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.⁴

While welcome, this clarification would have been more helpful had the express language been incorporated into the bill itself.

Governor Newsom’s Signing Statement

Upon signing the bill, Governor Newsom issued a written statement. The statement described the bill as “landmark legislation” that will “help reduce worker misclassification – workers being wrongly classified as ‘independent contractors,’ rather than employees.”  This language suggests Governor Newsom also views the bill as focused on alleged misclassification, rather than joint-employer status.

What Now?

These clarifications are welcome.  Franchisors and other upstream business entities now have some assurance that, if the subject worker is properly classified, they need not overhaul aspects of their operations that are tailored to California’s existing line of authority governing joint-employer status.

These developments, however, are a poor substitute for properly drafted statutory language clarifying the issue.  Unless and until the statute is revised, the issue will almost certainly be challenged by workers who are already classified as employees, but are citing AB 5 as grounds for joint-employer status of entities other than their actual employer. 

Even if the courts or legislature definitively clarifies this issue, franchisors and other upstream entities could still face misclassification claims. It is therefore recommended that these entities consult with counsel to help identify appropriate changes to standard policies, procedures, and contracts governing their relationships with downstream organizations.