California Governor passes new law expanding scope of Dynamex independent contractor test

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Last year, we discussed the California Supreme Court decision in Dynamex v. Superior Court, wherein the Court imposed a more stringent standard for employers to show that a worker is an independent contractor and not an employee. This month, Governor Gavin Newsom passed a law that incorporates the Dynamex decision into statutory law and gives the law broader scope. This new law, Assembly Bill 5, was fought by gig economy companies such as Uber and Lyft, to no avail. Though one appellate court previously found that the Dynamex standard did not apply to non-wage order claims, the new law makes Dynamex applicable to the Labor Code and to the Unemployment Insurance Code, giving independent contractors even more avenues for potential lawsuits.

To reiterate the Dynamex test, which is now spelled out in Labor Code section 2750.3, a worker shall be considered an employee unless the hiring entity can demonstrate that all of the following conditions are satisfied:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The new law does exempt several categories of professionals from this test, including but not limited to certain types of doctors (e.g., physicians, surgeons, and dentists); certain individuals in financial services (e.g., securities broker-dealer); individuals who hold an active license from the State of California and are actively practicing as a lawyer, architect, engineer, private investigator, or accountant; a direct sales salesperson as described in Section 650 of the Unemployment Insurance Code (so long as the conditions for exclusion under that section are met); and certain commercial fishermen.

The new law will take effect January 1, 2020. However, Dynamex is already the law in California, and companies should be ever mindful of the potential pitfalls of misclassifying an employee as an independent contractor.