Advocacy Alert: California AB 5 Codifies the Dynamex Independent Contractor Test and Expands the Definition of Employee

October 17, 2019

by Nelson Hardiman: see their Client Alert

Last month, in the wake of continued concerns over large gig-economy companies classifying workers as independent contractors, the State of California codified Dynamex and added a broader definition of "employee," which includes any "individual providing labor or services for remuneration who has the status of an employee rather than an independent contractor, unless the hiring entity demonstrates that the individual meets all of the specified conditions, including that the individual performs work that is outside the usual course of the hiring entity's business."

The bill also prohibits employers from reclassifying an individual who was an "employee" on January 1, 2019, to an "independent contractor" due to the bill's enactment.

Nelson Hardiman's May 2018 client alert, "California Supreme Court Announces New, Stricter Test for Evaluating the Independent Contractor Relationship", provided an update on the new "ABC" test set forth in Dynamex Operations, Inc. v. Superior Court.

This test uses three factors to determine whether independent contractors could remain as such – or whether they needed to be characterized as employees and requires that an individual providing labor or services for remuneration be considered an "employee" rather than an "independent contractor" unless the hiring entity demonstrates 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; and
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.

Employment status classification is somewhat more complicated for licensed professional healthcare workers, as physicians, surgeons, dentists, podiatrists, psychologists, and others performing healthcare services to or by a healthcare entity are expressly excluded from the" ABC" test. The statute provides that such professionals are to continue to be governed by the California Supreme Court test established in Borello (1989).

1. The individual maintains a business location, which may include the individual's residence, that is separate from the hiring entity;
2. If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in his or her profession;
3. The individual has the ability to set or negotiate his or her own rates for the services performed;
4. Outside of project completion dates and reasonable business hours, the individual has the ability to set his or her own hours;
5. The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds himself or herself out to other potential customers as available to perform the same type of work; and
6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

How does this apply to healthcare facilities?

With AB 5's statutory requirement that "all" of the factors under Borello be met, many professional healthcare workers may indeed need to be reclassified as employees, even where the "ABC" is not applicable. As a basic rule of thumb, even if a professional uses their independent discretion, if they show up "9 to 5" at the hiring entities' place of business, and the professional does not hold themselves out to the public other than through the hiring entity, they are correctly classified as employees and not independent contractors under the new law, regardless of other factors.

Also of note, the statute does not provide any exemption for nurse practitioners, nurse anesthetists, pharmacists, occupational/physical/speech/respiratory therapists, medical technicians or physician's assistants – some of whom may currently be serving as independent contractors for hospitals or medical staffs. All of these healthcare workers are presumably employees under the "ABC" test and should be classified as such.

Practically speaking, the statute will have minimal impact on hospitals, which traditionally classify their workers as employees ( other than physicians, of course). Nevertheless, certain healthcare professionals – such as nurse anesthetists – may actually be employees of an anesthesia professional group contracting with the hospital. This raises the issue of the hospital's contracting arrangements with non-physicians, which will require a case-by-case assessment for compliance with the new law.

AB 5 takes effect on January 1, 2020, and we encourage you to evaluate worker status now across your entire workforce and consider reclassifications before the end of this year.