On September 18, 2019, California Gov. Gavin Newsom signed Assembly Bill 5 into law. A.B. 5 codified Dynamex Ops. W. Inc. v. Superior Court (2018) 4 Cal.5th 903, which dramatically redefined how the state classifies independent contractors versus employees. A.B. 5 was drafted to target “gig” economy workers (i.e., Uber drivers, delivery drivers, and other workers “empowered” by a tech platform). However, A.B. 5 goes far beyond bringing Uber and Lyft to heel—it affects newspapers, nail salons, and law firms. The ABC Test, as modified by A.B. 5 and subsequent appellate decisions: 1) applies to wage order violations; 2) is not retroactive; and 3) is subject to specific carve-outs for professionals, which includes lawyers (more on that later).
Dynamex and A.B. 5 may impact the wider national economy because states (and some countries) often follow California’s lead on employment laws. For example, in 2004, California was the first state to mandate paid family leave. By 2020, Rhode Island, New York, Washington, New Jersey, and Washington, D.C. will have paid family leave. In 2016, California was the first state to pass a $15 minimum hourly wage, and now seven states and the District of Columbia have a $15 minimum hourly wage. Many more states are increasing their minimum wage beyond the current federal minimum. In short, the changes made in California are expected to be replicated across the country in the next few years.
The ABC Test
Dynamex established the ABC Test holding that a worker is presumed to be an employee unless the hiring entity establishes each of the following:
A) that the worker 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; and B) that the worker performs work that is outside the usual course of the hiring entity’s business; and C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. (Dynamex, supra, 4 Cal.5th at p. 957.)
However, Dynamex does not apply to all hiring entities, in all scenarios. Specifically, it is unsettled law if Dynamex applies retroactively. Additionally, Garcia v. Border Transportation Group, LLC (2018) 28 Cal.App.5th 558, 570-71, held that Dynamex only applies to “wage-order claims.” The Fifth District’s holding was echoed by the California Department of Industrial Relations, which issued an Opinion Letter dated May 3, 2019, confirming that Dynamex applies when a claim “derive[s]directly from,” or rest[s]on” an obligation imposed by a wage order, the ABC test applies to determine questions of employee status. See Dynamex, 4 Cal.5th at 942. See Dynamex, supra, 4 Cal.5th at pp. 942, 967 [applying ABC test to Labor Code section 226 (itemized wage statements), and sections 510 and 1194 (overtime provisions). Accordingly, the ABC Test does not apply to law firms in other contexts—such as workers’ compensation, harassment, and discrimination.
A.B. 5 further modified Dynamex by carving out specific exceptions, including, “an individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer …” Sec. 2 (incorporated as Cal. Lab. Code § 2750.3(b)(3). Finally, A.B. 5 empowers cities to investigate and prosecute employers who violate A.B. 5. Sec. 2 (incorporated as Cal. Lab. Code § 2750.3(j).
Dynamex/A.B. 5 Effect on Law Firms
A.B. 5 modifies Dynamex, incorporating several exceptions and limitations—including that licensed professionals are excepted from its provisions. Law firms can continue to hire lawyers and accountants as independent contractors without worrying about them being reclassified as employees. For example, a defense firm reviewing responsive client documents in response to discovery requests can continue to hire contract document review attorneys. Similarly, tax and accounting firms can continue to hire contract accountants, CPAs, and other licensed professionals.
However, law firms likely may not rely on contracted staff support, such as paralegals and secretaries—but they may continue to rely on contracted labor for other services, such as accounting and collections. Consider paralegals as an example. First, law firms likely (or at least should) control and direct the performance of paralegal work. Second, paralegals perform work that is within the usual course of a law firm’s business. Third, paralegals do not customarily engage in an independently established trade—in fact, in most jurisdictions, paralegals are expressly forbidden from performing legal work. Therefore, paralegals may not be classified as independent contractors under the ABC Test.
Subject to the rules of professional conduct, law firms may continue to hire contract attorneys for document review, discovery, and other tasks ordinarily assigned to contract counsel. Law firms also can continue to utilize “of counsel” and similar arrangements. Mixed law/accounting firms also can continue to utilize contract attorneys, of counsel, and contract accountants/CPAs. However, law firms likely may not contract support functions – such as paralegals, secretaries, file clerks, runners, librarians, and law clerks (possibly, even from staffing agencies).
Possible Penalties
Bearing in mind that entire books are written about California employment/labor violations, the following is a non-exhaustive list of possible penalties:
- State employment-related payroll taxes. Cal. Lab. Code §§ 2802 and 3710.1 (reimbursement for unpaid payroll taxes, unemployment insurance, disability insurance, workers’ compensation insurance, as well as, fines and penalties);
- Civil penalties of $5,000 to $15,000 for misclassifying penalties (increased to $10,000 and $25,000 if there is a pattern or practice). Cal. Lab. Code §§ 226.8 and 2753;
- Civil penalties of $50 to $100 per employee for failure to keep accurate records (plus up to 25% of wages not paid to each employee each pay period). Cal. Lab. Code § 210;
- Civil penalties of $250 for each employee for failure to provide wage statements. Cal. Lab. Code § 226.3;
- Civil penalty of 10% plus interest for unpaid contributions to unemployment insurance and disability insurance. Cal. Ins. Code §§ 1112 and 1113.2;
- Possible misdemeanor conviction and $1,000 fine for failure to withhold state income taxes. Cal. Unemployment Ins. Code § 2118; and
- Federal penalties for unpaid payroll taxes, failure to withhold federal income tax, unpaid FUTA, and FICA.
Dynamex and A.B. 5 are recent law, so many questions remain to be answered (for example, how are staff in co-working spaces treated—if they provide services to law firms and do take some directions—but their work is directed by multiple companies in the co-working space?). In short, California law firms that rely on contracted staff should proceed cautiously, and set-up a Google alert for California Department of Industrial Relations opinion letters. For all other law firms, it’s time to start developing transition plans—especially if you live in a state that often follows California’s lead (e.g., New York, New Jersey, Illinois, the Northeast, Oregon, Washington, and D.C.).
About the Author
Robert Bryson is an attorney based in San Diego, CA who focuses his practice on civil rights and consumer issues. Contact him at rtbrysonlaw@gmail.com.