California law and employee misclassification

Frank S. Clowney III

Of the several landmark changes to California employment law that took place in 2019, perhaps the most significant one addressed how a business can classify its workers. Businesses across the country have increasingly labelled their workers as independent contractors instead of employees, and in California the advantages of doing this are significant, as the state provides generous basic wage and benefits to employees.

Assembly Bill 5 (AB5) codified a California Supreme Court case, Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamix). In this case, the ruling created a presumption that any hired worker is classified as an employee and thus eligible for the protections of minimum wage, sick leave, unemployment and worker’s compensation benefits guaranteed under state law, unless proven otherwise.

AB5 stipulates that the burden of proving that an employee was misclassified is on the employer, who must prove that the worker is an independent contractor by satisfying a three-pronged test:

  • The person is free from the control and direction of the hiring entity in connection with the performance of the work
  • The person performs this work outside of the usual course of the hiring entity’s business
  • The person is typically engaged in an independent established trade, business or occupation

A gray area in the gig economy

The new law was recently challenged by both Uber and Lyft, whose practice of misclassifying their drivers as independent contractors raised the ire of the California Labor Commissioner and resulted in lawsuits against the companies in 2020. After the companies threatened to leave the state, the passage of Proposition 22 last November created an exception for Uber and Lyft in how they classify their workers.

This new measure exempts the companies from having to classify their workers as employees but does require them to offer workers basic benefits such as state minimum hourly wages. While the new law splits the difference between the two opposing sides, it also flies in the face of current state law and opens up a gray area that may well be exploited in future worker misclassification lawsuits.

California offers some of the strongest employment protections in the country, but workers who are not aware of state labor laws may end up misclassified, underpaid or wrongfully terminated. For residents of San Diego County, it is essential to have knowledgeable legal representation to advocate for your rights under current state and federal laws.