California Governor Gavin Newsom signed legislative Assembly Bill 5 (“AB5”) into law on September 18th, after much drama and contention between lawmakers and gig economy companies. After 18 months of uncertainty, California worker classification law is finally clear since the landmark Dynamex decision of April, 2018. The Dynamex case radically changed 30 years of worker classification law from the multi-factor test set forth in Borello, to the ABC Test, which essentially eliminated the independent contractor status for California workers. AB5 brought back the possibility of independent contractor status for some industries, including attorneys.
The Dynamex decision sent California employers into a panic, especially within the gig economy, which heavily relies on independent contractors. The ABC test set forth in Dynamex signaled the probable demise of the gig economy, especially if the test expanded beyond the wage order, either judicially or legislatively. The freelance attorney model was in serious trouble. But we sat tight, and the Dynamex decision was later limited to the wage order in Garcia v. Border Transportation Group, LLC. The gig economy breathed a temporary sigh of relief.
Montage Legal Group wrote an article about AB5’s effect on freelance attorneys, New Bill Clears Path for Freelance Attorney Independent Contractor Status, which was published on Law.com on September 12, 2019.
The freelance attorney marketplace is distinct from the traditional notion of contract attorneys who are brought in to law firms for basic litigation support or due diligence. Rather, freelance attorneys represent a previously untapped crop of talent – lawyers who have fled BigLaw due to intense work demands and need for a more balanced family life. The freelance attorney model – where freelance attorneys work remotely for other law firms – has given these attorneys a place to land.
This exodus of women, many of whom are graduates from the country’s most prestigious law schools, has resulted in the birth of companies that connect them with law firms seeking top notch attorneys. These platforms, such as Montage Legal Group, have been thriving. Montage currently has approximately 350 attorneys participating in its platform, about 85% of whom are women, and a growing client roster of law firm clients. In short, the freelance attorney model is a game changer for some of the country’s elite legal talent, as more attorneys and law firms realize the cost and lifestyle benefits of the freelance relationship. Many freelance attorneys feared that they may be forced to join law firms again, or quit law entirely, depending on their circumstances. Neither was an attractive option. Law firms similarly feared they would lose access to true freelance attorneys who provide intermittent assistance, and have been an important resource.
“Freelance attorneys have generally been treated as independent contractors. However, the decision set forth in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 (“Dynamex”) radically altered 30 years of California worker classification law by utilizing the “ABC Test” instead of the multi-factor test set forth under S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341 (“Borello”), and essentially eliminated the independent contractor status for California workers.”
Under the ABC test, a worker is presumed to be an employee unless the hiring entity proves that (A) the worker is free from the hiring entity’s control; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independent business of the same nature as the work performed for the hiring entity.
The “B Factor” is the biggest issue with the ABC Test. Under the B Factor, a company can never hire an individual as an independent contractor if they perform work that is within “the usual course of the hiring entity’s business.” This means that a lawyer cannot be an independent contractor if working for another lawyer, a graphic designer cannot be an independent contractor if working for a graphic design company, a journalist cannot be an independent contractor if they are writing for a publication. This all makes sense when dealing with workers who need protection, but it quickly defies logic when dealing with licensed professionals.
“The Dynamex decision is intended to shield California workers from misclassification as independent contractors, which provides fewer legal protections for workers than employee status. Worker protection is an important goal, but blanket application to all workers goes far beyond protection and creates unintended negative consequences for some workers, businesses, and consumers. Certain industries, including licensed professionals and independent business owners, do not logically fall under blanket employee classification. Under the ABC Test, an attorney assisting a law firm with legal projects would be classified as an employee, regardless of how tenuous or infrequent the relationship between the contract attorney and the law firm.”
AB5 – Hero for Some, Villain for Others
Thankfully for some, in late 2018, Assembly Member Gonzales introduced legislation to clarify and codify the Dynamex decision. The bill is intended to “codify the decision in the Dynamex case and clarify its application,” and expands the Dynamex decision beyond the wage order to include the Labor Code and other provisions. AB5 has not been without drama. The California Senate placed the Bill in the suspense file when it lacked agreement on exempted professionals. Not surprisingly, gig companies like Uber, Lyft, and DoorDash unsuccessfully pushed for exemption. But the Bill made it out of the suspense file, and it went to a full vote on September 11th, passing 56-15. Governor Gavin Newsom signed the bill on September 18, 2019.
Which Industries are Exempt?
AB5 limits the ABC test to a certain extent and provides an exempted list of workers who are not affected by its reach. This list includes:
- doctors, dentists, and veterinarians;
- lawyers, architects, engineers, private investigators, and accountants;
- securities broker-dealers and investment advisers;
- human resources administrators;
- travel agents;
- marketers, graphic designers, grant writers, fine artists, certain photographers or photojournalists, and certain freelance writers and editors.
There are also several additional classifications of exemptions that carry certain conditions. For example:
- Commercial fishermen are exempt from all requirements except from unemployment insurance;
- Estheticians, electrologists, manicurists, barbers, and cosmetologists are exempt but only if they set their own rates, are paid directly by clients, schedule their own appointments, and follow several other requirements more akin to independent workers than employees; and
- Salespersons are exempt, but their pay must be based on actual sales as opposed to wholesale purchases or referrals.
We Are Not Lawless! Borello Still Applies
The Borello “multi-factor” or “economic realities test” has remained unchanged since 1989, but law firms and freelance attorneys should be vigilant in light of increased worker misclassification scrutiny.
The Borello test indeed includes many factors, but it is also fairly easy to determine whether a worker is truly an independent contractor or an employee. Do you have an exclusive relationship with your independent contractor? (That’s not an independent contractor). Have you provided your independent contractor with an office? Supplies? A title? (That’s an employee). Have you paid for your independent contractor’s licensing dues or professional development? (Also an employee). Do you dictate your independent contractor’s hours? Location? Probably an employee!
In light of these factors, there are considerations that businesses and freelance professionals should recognize to ensure that they remain contractors:
- Does the freelance professional work on site, or remotely?
- Does the freelance professional work exclusively for one business, or many?
- Does the freelance professional set his or her own rate?
- Does the freelance professional supply his or her own office equipment?
- Is there an understanding between the freelance professional and the business that they are not in an employer/employee relationship?
Freelance legal platforms – where freelance attorneys set their own rates, supply their own office equipment, and decline work at will – provide the safest bet. Law firms procuring freelance attorney assistance directly need to exercise caution, and keep the Borello factors in mind. The very thing that attracts attorneys to freelance work – autonomy – is the key to ensuring the industry’s survival.
AB5 is the law for worker classification in California, although there may be additional industries exempted by future legislative amendments. Thanks to AB5, legal freelancing, and other high-level professional freelancing, remains an option. Other industries will need to adjust, or may cease to exist. As for Montage, freelance attorneys are grateful for the ability to continue handling flexible legal consulting projects, and law firms will continue benefiting from an important resource.
To read more about AB5 and the gig economy, check out Fisher & Phillips partner Benjamin Ebbink’s blog articles, which provide useful information about legislative updates: https://www.fisherphillips.com/california-employers-blog/the-fisher-phillips-guide-to-pending-employment.