On January 14, 2021, California’s Supreme Court concluded in Vasquez v. Jan-Pro Franchising Int’l, Inc. (2021) 10 Cal.5th 944, 273 Cal.Rptr.3d 741, 478 P.3d 1207 that its Dynamex decision and its use of the so-called ABC test, later codified after the passage of Assembly Bill 5, applies retroactively. The Vasquez holding subjects taxpayers, potentially even those currently protected by enumerated carve-outs, to years of state employment tax liability (and so much more!) before Dynamex was codified by AB 5. See Cal. Labor Code §§ 3351, 2750.3 and Cal. Unemp. Ins. Code §§ 606.5, 621.
For context, AB 5 passed the California Legislature and was signed into law by Governor Gavin Newsom in September 2019. The legislation codified Dynamex, which applied the “ABC” test for certain worker classification purposes. The ABC test requires that a person providing labor or services for remuneration be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is: (A) free from the control and direction of the hiring entity in connection with the performance of the work; (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. AB 5 generally expanded the application of the ABC test described in Dynamex to the Unemployment Insurance Code (CUIC), the wage orders of the Industrial Welfare Commission, and the Labor Code, subject to numerous exemptions.
If a hiring entity cannot satisfy each prong of the ABC test, California law classifies the worker as an employee and the following provisions of the CUIC apply to that employment relationship – wage withholding, unemployment insurance contributions, state disability insurance withholding, and employment training tax. And, of course, there are numerous non-tax issues that flow from an employment determination under the ABC test, such as minimum wage payment, overtime pay, meal and rest breaks, reimbursement of necessary business expenses, and payment of workers compensation benefits.
While AB 5 generally applies the three-part ABC test for determining a worker’s classification, the law provides over fifty specific carve-outs and establishes different standards and tests for certain professions, occupations, and industries. One of particular note is the carve-outs provided by the passage of Proposition 22, on California’s November 2020 ballot, for app-based rideshare and delivery drivers.