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California Questions

What Do Employers Need to Know Following the Passage of California's New Law on Independent Contractor Misclassification?

October 8, 2019

by Gabrielle Wirth, Pavlina Kochankovska Rafter, Nisha Verma, and Jessica Linehan

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On September 18, 2019, Governor Gavin Newsom signed into law Assembly Bill 5, which clarifies when workers should be considered “employees” under the California Labor Code and the California Unemployment Insurance Code, thereby entitling them to the protections afforded by those laws. The bill codifies the standard set out in last year’s California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which narrowed the circumstances under which a worker can properly be classified as an independent contractor. Specifically, under the new law, in order for a worker to properly be classified an independent contractor, the employer has the burden of establishing the following three elements (commonly referred to as the “ABC” test):

(A) 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;

(B) The person performs work that is outside the usual course of the hiring entity’s business;

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Most of the provisions of AB 5 become effective on January 1, 2020. Below are some answers to frequently asked questions to help employers navigate this significant development.

  1. Is the law under AB 5 any different than the Dynamex ruling? Under Dynamex, the “ABC” test was limited to the resolution of the employee or independent contractor question in claims arising under California’s Wage Orders—for example, claims for failure to pay minimum wage, overtime, or failure to provide adequate meal and rest periods. AB 5 codifies the decision in the Dynamex case and expands the application of the “ABC” test not only for purposes of the Wage Orders, but also the Labor Code and Unemployment Insurance Code as well.  This means that the “ABC” test will apply to more claims, including failure to reimburse necessary business expenses, failure to provide accurate and complete wage statements, claims for waiting time penalties under Labor Code section 203, potential recovery of Private Attorney General Act (PAGA) penalties, and failure to provide workers’ compensation insurance.AB 5 also empowers the California Attorney General and specified local prosecuting agencies to pursue injunctions against putative employers suspected of misclassifying their workers.
  2. Are there any exceptions to the application of the new standard in AB 5? AB 5 provides an exemption for a number of industries and occupations, subject to licensing and other requirements, including:
    • Insurance brokers
    • Physicians, surgeons, dentists, podiatrists, psychologists or veterinarians
    • Lawyers, architects, engineers, private investigators and accountants
    • Registered securities broker-dealer or investment adviser and their agents and representatives
    • Direct sales salespersons (if they meet certain factors)
    • Commercial fishermen working on an American vessel (until January 1, 2023)
    • Contracts for “professional services” such as marketing, human resources administration, travel agents, graphic designers, grant writers, fine artists (if they meet certain factors)
    • Photographers, photojournalists, freelance writers, editors, or newspaper cartoonists (if they meet certain factors)
    • Licensed estheticians, electrologists, manicurists (until January 1, 2022), barbers, or cosmetologists (if they meet certain factors)
    • Real estate agents
    • Licensed repossession agencies
    • Bona fide business-to-business contracting relationships (under certain conditions)
    • Construction subcontractors (for work performed after January 1, 2020, under certain conditions)
    • Construction trucking services (until January 1, 2022)
    • Tutors (if they meet certain factors)
    • Motor club services

    For these occupations, the determination of employee or independent contractor status will be governed by the more flexible, multi-factor test outlined in the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations.

  3. What effect does AB 5 have on an employer’s obligation to provide workers’ compensation insurance? The California Labor Code, at sections 3200 et. seq., requires employers to have workers’ compensation insurance covering their employees. AB 5 amends section 3351 of the Labor Code so that, for the purposes of determining the obligation to provide workers’ compensation coverage, the “ABC” test governs. Accordingly, workers who fall within the “ABC” test (and are not covered by an exception), should be covered by workers’ compensation insurance. Note that the narrowed definition of employee does not become effective until July 1, 2020 (with respect to the workers’ compensation provisions specifically).
  4. Will AB 5 affect an employer’s obligation to pay payroll taxes? The Unemployment Insurance Code imposes obligations on employers to pay certain amounts of Unemployment Insurance Tax and Employment Training Tax for its employees. Because AB 5 changes the definition of “employee” in the Unemployment Insurance Code, employers will have to pay these payroll taxes for workers who meet the definition of “employee” under the new test.
  5. Does AB 5 affect how much employers will have to withhold from employee’s paychecks? The Unemployment Insurance Code also imposes obligations on employers to withhold a portion of employees’ wages for State Disability Insurance and for California personal income tax. Accordingly, employers will have to make these withholdings for workers who meet the definition of “employee” under the new test.
  6. Does AB 5 affect an employer’s obligation to provide health insurance? Prior to AB 5, neither the California Labor Code nor the Unemployment Insurance Code imposed an obligation to provide health insurance to employees.  The amendments to these statutes pursuant to AB 5 do not add a requirement to provide health insurance to employees.  The federal Affordable Care Act sets up a scheme whereby “large” employers must either provide health insurance to a certain percentage of their employees, or pay specified penalties.  We have not yet seen any developments indicating whether the change in the definition of “employee” under California law will affect the determination of whether a worker is considered an “employee” under the federal ACA.  However, we are monitoring this issue closely.Note, however, that some jurisdictions in California, such as San Francisco, require certain employers to satisfy health care spending requirements for employees. The amount of required spending is based on the number of the employer’s employees, with small employers potentially exempt from the requirement. AB 5 could have an impact on how these requirements apply to employers.
  7. Can employers continue to pay workers who were formerly classified as independent contractors on a piece rate or project basis? AB 5 does not impact an employer’s ability to pay workers on a piece rate basis.   In order to properly do so, however, the employer must satisfy all requirements for paying employees by the piece or unit produced.   Namely, among other things, the employer must pay the employee not less than the applicable minimum wage for all hours worked in the payroll period, compensate employees for rest and recovery periods and for other nonproductive time separate from any piece-rate compensation, and ensure that piece-rate workers are paid overtime for hours worked in excess of eight in a day or forty in a week.
  8. What effect does AB 5 have on employers who hire temporary workers through a staffing agency? AB 5 does not have a direct effect on employers who hire temporary workers through a staffing agency, assuming the staffing agency categorizes those workers as employees of the staffing agency, and not independent contractors. If the staffing agency categorized those workers as independent contractors, and placed the workers at the contracting company’s site, arguably working subject to the control of the contracting company, there is a risk that the workers could make a claim of misclassification based on the “ABC” test against both the staffing agency and the contracting company. We recommend companies retaining temporary workers through a staffing agency confirm that the staffing agency classifies the workers placed as employees, unless they clearly meet the definition of an independent contractor.

The decision as to whether to reclassify workers, and the changes to payroll and other benefits that may come along with it, continues to be nuanced. If you have independent contractors within your workforce, contact your Dorsey employment attorney for guidance.

Related Categories:

California Questions,

Independent Contractors,

Labor Law

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EPA Limits Title V Re-Litigation of NSR Permits

Overview On September 25, 2026, the U.S. Environmental Protection Agency (“EPA”) published a final rule that significantly limits the ability of third parties to use the Clean Air Act (“CAA”) Title V permitting process to revisit New Source Review (“NSR”) permitting decisions years after those decisions were made. The rule establishes that NSR permitting determinations generally must be challenged during the original permitting proceeding, thereby providing regulated sources with greater permitting certainty and finality for major capital projects. Published in the Federal Register titled Clarifying the Scope of “Applicable Requirements” Under State Operating Permit Programs and the Federal Operating Permit Program (Docket ID No. EPA-HQ-OAR-2023-0401), the rule amends 40 C.F.R. Parts 70 and 71 to codify EPA’s interpretation regarding when requirements established under other CAA programs may be reviewed, modified, or implemented through the Title V operating permit program. The rule becomes effective 30 days after publication. The rule addresses two principal issues: (1) the relationship between NSR preconstruction permitting and Title V operating permits, and (2) the treatment of the General Duty Clause under CAA section 112(r)(1). Most significantly, the rule provides greater certainty for sources navigating the NSR permitting process. EPA’s amendments are intended to ensure that NSR permitting decisions made through an approved public process are generally not revisited later through Title V permit proceedings. The rule responds to a circuit split between the U.S. Courts of Appeals for the Fifth and Tenth Circuits. In Environmental Integrity Project v. EPA, 969 F.3d 529 (5th Cir. 2020), the Fifth Circuit upheld EPA’s interpretation, concluding that it was consistent with the text, structure, and purpose of Title V. In contrast, the Tenth Circuit reached the opposite conclusion in Sierra Club v. 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Permit applicants should ensure that applicability analyses, emissions calculations, control technology evaluations, modeling demonstrations, and supporting technical documentation are thoroughly developed during the original permitting proceeding. For significant projects, applicants may therefore have an additional incentive to identify and resolve potential permitting issues before the NSR permit is issued rather than assuming that unresolved issues can be addressed during a subsequent Title V proceeding. Potential Incentive for Broader Public Participation EPA also notes that permitting authorities may choose to provide public notice and an opportunity for comment for a broader range of NSR permits because permits issued through a qualifying public process receive the benefit of the finality framework established by the rule. 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Department of Energy Approves Funds for Grid Improvement The U.S. Department of Energy (DOE) recently announced that it would fund 31 grid-improvement projects in 26 states. The funding initiative is part of the DOE’s “SPARK” initiative. The funding will include $1.9 billion in federal funding from DOE and $3.35 billion in recipient cost-sharing funding. The funds will go to projects designed to improve grid reliability and lower electricity costs. Recipients plan to reconductor over 1,500 miles of transmission lines and will deploy grid-enhancing technologies across approximately 21,000 miles. DOE stated that this initiative will make available over 23 additional gigawatts of electricity. Texas Moderates Rules Governing Data Center Interconnection The Texas Public Utility Commission adopted new regulations governing large-load interconnections. 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FERC Denies TransAlta 202(c) Cost-Recovery Plan The Federal Energy Regulatory Commission (FERC) recently rejected TransAlta’s plan to recover $19.9 million in expenses stemming from a DOE order in which DOE prohibited TransAlta from retiring its coal-powered Centralia power plant. TransAlta had previously intended to retire the facility at the end of 2025. TransAlta’s cost recovery plan proposed spending an additional $23 million on repairs to continue operating the unit. FERC’s main objection had to do with geographic scope. TransAlta’s recovery plan called for recovering costs from California Independent System Operator (CAISO) and the Southwest Power Pool (SPP), but the DOE’s order requiring operation of the plant was designed to ensure reliability in the Northwest assessment area (Montana, Oregon, Washington, and parts of northern California and northern Idaho). Accordingly, FERC was unwilling to allow cost recovery from CAISO and SPP when the order that precipitated the additional costs only related to the Northwest assessment area. FERC informed TransAlta that it would only approve cost recovery from load-serving entities in the Northwest assessment area. FERC’s decision comes amid a rush of DOE emergency orders requiring the continued operation of coal-fired generating units. Litigation Appeals Court Upholds Washington Hydropower Plant With Caveats In a September 21, 2026, opinion, the Washington Court of Appeals largely upheld a Clean Water Act water quality certification by the Washington Department of Ecology for the Goldendale Energy Storage Project, a proposed pumped-water storage hydropower system adjacent to, but off-stream from, the Columbia River. A nonprofit (Columbia Riverkeeper) and the Confederated Tribes and Bands of the Yakama Nation appealed the certification, contending that it failed to impose necessary conditions and monitoring requirements to protect the water quality of the Columbia River. Most saliently, the plaintiffs argued that the project had the potential to leak 100 acre-feet of water per year into tributaries of the Columbia River. The Court of Appeals broadly rejected plaintiffs’ challenge to the state’s conclusion that “the project was designed not to leak.” That said, the Court of Appeals did reverse on one narrow issue. Specifically, the court determined that the state’s conclusion that “leakage from the project’s tunnels would be monitored and reported” was not supported by the evidence because the certification “does not explicitly require monitoring and reporting to determine whether there is any leakage.” Accordingly, the court remanded the matter to the state to impose monitoring and reporting requirements but otherwise affirmed the certification. Legislative Developments California Legislates Restrictions on Data Center Energy Use and Grid Costs On September 21, 2026, California Governor Gavin Newsom signed seven bills broadly regulating data centers in the state. SB 1168 directed the California Public Utilities Commission to assess the energy used by data centers. It also requires the PUC to pass costs of transmission and distribution upgrades and load increases on to data centers, rather than customers. SB 886 and SB 887 compel data centers to pay for infrastructure upgrade and generation costs, and wildfire mitigation costs, in addition to imposing environmental review. The statutes additionally increase local oversight of data centers. AB 1577 imposes a monthly reporting requirement that requires data centers to supply energy consumption and efficiency data to the California Energy Commission. AB 2383 contains incentives for data centers to use onsite clean energy generation. Finally, AB 2469 and AB 2619 require data center developments to assess water supply and develop a water scarcity plan. The statutes also mandate statewide water reporting as a precondition to obtaining and renewing business licenses.