So You Think California Forgot About AB-5 Enforcement?

It’s been a rough year so far for business (and for us all personally). 

Between the: (a) “shelter” orders, (b) business shut downs, re-openings, and new re-closings, (c) layoffs and high unemployment, (d) businesses feeling the pinch of decreased sales and increased operating costs, at the same time (e) trying to restructure operations in this new COVID world, … the current challenges for business are daunting at best. 

With all of that in play, it is easy to forget that as of January 1, 2020, the State of California codified a seismic shift with respect to how businesses must classify a 1099 contractor versus employee (Cal. Labor Code §2750.3 – a.k.a. AB-5). Basically, all service providers are now “employees” and not 1099 contractors unless: (1) the engagement satisfies all three prongs of the “ABC Test”; or (2) there is a codified exception for the specific service and how it is rendered. 

As a reminder, the “ABC” test is a 3-prong test with respect to which all three prongs must be met to have a 1099 contractor classification. The three (3) prongs are as follows: (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; and (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. 

Well the California Attorney General, and the City Attorneys for Los Angeles, San Diego and San Francisco did not forget about AB-5. On May 5, 2020, in the midst of the “shelter-in-place” orders from Governor Newsome, at a time when the courts were closed to all but emergency and criminal matters, the State of California filed an AB-5 enforcement action in the San Francisco Superior Court against Uber and Lyft for violation and enforcement of Labor Code §2750.3 (People of the State of California v. Uber Technologies, Inc., et. al., Case No. CGC 20584402).

The State is alleging that all of Uber and Lyft’s 1099 contract drivers are intentionally misclassified and must be classified as “employees”. The complaint requests injunction and demands monetary restitution in the form of minimum and overtime wages, meal and rest period premiums, unreimbursed business expenses, unpaid sick leave, along with taxes, penalties and interest to the State. 

At or about the time of the filing, Governor Newsome held a press conference stating among other things he was asking for more funds in the State budget to bring further enforcement actions. 

With all the COVID tumult going on at the time, this may have flown under the radar for most. However, I noticed, and I see this as a very clear, unequivocal statement by the State of California to all businesses that the State will enforce the new AB-5 labor laws, and they do not care what your business may be going through – COVID be damned. This is nothing less than a wake-up call from the State. 

If you need further evidence, just this month, on or about July 1, 2020, the Commissioner of the Division of Labor Standards Enforcement filed an AB-5 enforcement action against a mobile car wash company based in Bellflower (with 100 “employees”) seeking to recover unpaid wages and overtime premium pay, unreimbursed business expenses (including costs associated with uniforms, car washing tools and equipment, insurance, cell phone service, and mileage), rest period premiums, misappropriated gratuities, waiting time penalties, and liquidated damages on behalf of the allegedly misclassified car wash “employees”, as well as unpaid taxes, penalties and interest to the State. (Garcia-Brower v. Mobile Car Wash, Inc., LASC Case No. 20STCV24800.) This lawsuit is also filed against the company’s president personally for willful violation. 

Does the State of California have your attention yet? It can be very costly to be found to have misclassified and paid your “employees” as 1099 contractors, and definitely costly to defend. And the State is coming to enforce the labor laws. 

This is a time when businesses are in the midst of evolution. They have to adapt to the new economic realities that, most will agree, has transformed business forever. Companies should be revising and implementing new strategic business plans and reorganizing their operations accordingly. Based upon the clear exposure that this new law poses, AB-5 compliance (or shift of the risks for non-compliance, which is possible in some cases) should be high on the list of business strategies to address now.

If you use 1099 contractors in your business, I strongly advise, at the very least, you obtain a professional assessment of your compliance, compliance strategies, and exposure for non-compliance with Labor Code §2750.3. Your legal counsel and HR Specialists will be familiar with the issues and can offer consultation and options. But at least, know your business exposure. 

Be advised, be well and take care of business.