The ABCs of California’s new employment regulations

Bill impacts businesses that use ‘independent contractors’

Traditionally, California employers have hired workers as employees or independent contractors to fit the needs of their businesses. The state’s laws generally require employers to provide employees with protections such as overtime compensation, paid sick leave and unemployment and workers’ compensation insurance. Independent contractors, on the other hand, do not receive the same protections, but they retain greater freedom to organize and control their own work and provide services for multiple businesses.

In September 2019, California Governor Gavin Newsom limited employers’ ability to classify a worker as an independent contractor by signing a new law that goes into effect on January 1, 2020.

Under Assembly Bill 5 (AB 5), a worker is automatically treated as an employee unless:

(A) The worker is free from the control and direction of the employer in the worker’s day-to-day work and in the written agreement setting up the contractor relationship between the two parties; and

(B) The worker performs work that is outside the usual course of the employer’s business; and

(C) The worker is customarily engaged in an independently established trade, occupation or business that is similar to the work being performed for the employer.

AB 5 exempts certain occupations and professions (such as attorneys, accountants, doctors and licensed insurance and real estate brokers) from the A-B-C test. Instead, these positions may be characterized as independent contractors if they meet a more detailed test traditionally used by California courts and state administrative agencies.

The California Legislature designed AB 5 to make it much harder for employers to classify individuals as independent contractors, after concluding that intentional independent contractor misclassification denied workers basic workplace protections and benefits. The law appears to implicitly target employers with business models that rely heavily on “gig workers” as these employers typically classify them as independent contractors. The law also expressly authorizes the state attorney general and attorneys for certain municipalities to sue employers that continue to misclassify workers as independent contractors.

But AB 5 could have multiple impacts on the cannabis industry. Dispensaries that retain and pay couriers as independent contractors to deliver products to customers or patients may be violating the law if the couriers do not meet the A-B-C test; cannabis farmers who hire harvesting crews as independent contractors may need to hire these individuals as employees moving forward; and entrepreneurs utilizing consultants to set up their businesses may need to hire them as employees. Finally, ambitious local prosecutors or city attorneys could target cannabis businesses — already subject to a very high level of legal and regulatory scrutiny — to detect and halt independent contractor misclassification under this law.

Some employers have ensured that their independent contractors are properly classified under the A-B-C test or modified their businesses to allow contractors to meet this test. Others are in the process of reclassifying their contractors as full- or part-time employees. Still others are resolving to continue to classify their workers as independent contractors and to challenge the legality of AB 5 in court.

Each of these options carry potential logistical and legal risks, and employers in California’s cannabis industry should consult with human resources specialists or employment counsel to fully understand how AB 5 will impact their business and what steps should be taken.

 

Conor Dale is a principal with the law firm of Jackson Lewis, P.C. He provides strategic advice and counseling to employers regarding independent contractor and employee classification issues and represents businesses in the cannabis industry.

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