Classifying a California worker as an independent contractor instead of an employee comes with risk, but the consequences are increasing on several fronts.

Before AB 5 went into effect on January 1, 2020, the classification test depended on the type of claim or worker right at issue – e.g., workplace conduct, unpaid wages, unemployment insurance, workers' compensation insurance. AB 5 means all workers are presumed to be employees unless the employer proves otherwise by using the "ABC test" to determine if a worker may be classified as an independent contractor instead of an employee. AB 5 enables the California attorney general, city attorneys, and local prosecutors to sue companies over violations. See our prior blog posts on AB 5 here.

Recent AB 5 Developments

On July 1, 2020, AB 5 became effective for purposes of workers' compensation coverage. California has taken steps to expand workers' compensation benefits during the pandemic, such as creating a rebuttable presumption that COVID-19 positive essential workers contracted the illness at work. See our prior blog post here.

On June 29, 2020, Governor Newsom signed the Budget Act of 2020, which approved a $21.68 million investment in resources to enforce AB 5. The state budget funds "resources to implement AB 5, including $17.5 million for the Department of Industrial Relations (DIR), $3.4 million for the Employment Development Department (EDD) and $780,000 for the Department of Justice."

The budget does not detail how the funds will be allocated within each agency (or require any specific internal allocation within the agencies). Instead, the budget provides that the funds will be used to enable agencies to "train employees on the employment determination test and to conduct more hearings, investigations, and litigation related to AB 5."

Dozens of new DLSE positions are expected to be added, all of which will focus solely on AB 5 compliance and enforcement. The Division of Workers' Compensation (DWC) is a division of the DIR, and importantly, will directly benefit from the financial boost to step up its prosecution of failure to provide coverage to misclassified workers.

The California Public Utilities Commission (PUC), a regulatory agency which oversees transportation network companies like ride-sharing, sought proof of workers' compensation coverage for drivers. In June, the PUC warned ride-sharing companies that drivers are employees for workers' compensation insurance purpose, based on AB 5's July 1, 2020, effective date. PUC threatened suspension of the ride sharing companies' ability to provide services in the state.

PAGA Liability Under AB 5

In addition to agency enforcement of AB 5 boosted by a financial push from the state, California employers can also expect related claims directly from workers. For example, the Private Attorney General Act (PAGA), which provides for civil penalties for violations of the Labor Code on a representative basis – e.g., on behalf of all similarly situated California employees. PAGA creates enormous penalties in large part because Labor Code violations can be stacked such that individuals can bring claims for multiple perceived wrongs, including misclassification under AB 5 and failure to provide workers' compensation coverage.

As California employers navigate a new normal, they can expect sustained and increased scrutiny of worker classification from state agencies and both public and private litigants. AB 5 is here to stay, until and unless the November 2020 ballot measure is successful in repealing the law.