Does AB 5 Apply to Public-Sector Employers? Lawmakers Aren’t Finished

This article, written by RPLG Founding Partner Jon Holtzman, was originally published in the February 24, 2020 edition of the California Employment Law Letter.

California Assembly Bill (AB) 5, which Governor Gavin Newsom signed in late 2019, codified into law the landmark California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which created a presumption that a worker who performs services for a private company is an employee for purposes of wage and benefits claims arising under the Wage Orders issued by the Industrial Welfare Commission (IWC). The question now is whether AB 5 applies to public-sector employees. Let the debate begin.

How We Got Here

Under Dynamex, an employer must satisfy a three-part test—commonly known as the “ABC” test—to establish a worker is an independent contractor under the Wage Orders. Because the case was decided under IWC Wage Orders that generally don’t apply to public agencies, it’s generally accepted that (1) Dynamex had no application to the public sector and (2) the well-established commonlaw “control” test continued to apply in the public sector.

In September 2019, the California Legislature passed AB 5, which codified the test announced in Dynamex for purposes of the Wage Orders but also extended the test to benefits and wages arising under the California Labor Code and the Unemployment Insurance Code. AB 5 added Section 2750.3 to the Labor Code, which provides, in part: For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the [IWC], a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

1. 1. 1.  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.
      2. The person performs work that is outside the usual course of the hiring entity’s business.
      3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 May Apply to Public Agencies

Since AB 5 was passed, the debate about whether it applies to public agencies has been vigorous. For the most part, the arguments have taken place through competing law firm newsletters—an odd forum, to say the least. The upshot is a pervasive concern in the public sector that AB 5 may apply in some circumstances.

AB 5 doesn’t expressly state whether it applies to public employers. Rather, it merely makes the new ABC test for classification applicable to all Labor Code and Unemployment Insurance Code provisions.

Because AB 5 doesn’t specifically cover public agencies, there is a strong argument it doesn’t apply under the Labor Code. Generally, “provisions of the Labor Code apply only to employees in the private sector unless they are specifically made applicable to public employees.” (Campbell v. Regents of University of California (2005) 35 Cal.4th 311, 330.)

If a Labor Code provision is silent about public employers, then courts will apply such a provision to public employers only if “no impairment of sovereign powers would result” from doing so. (City of Los Angeles v. City of San Fernando (1975) 14 Cal.3d 199, 276-277, disapproved on other grounds in City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1248.

‘Bedrock Protection for the Public Would be Eviscerated’

Making contractors into employees would impair one of the most sovereign of powers: the power to determine who is a public employee. Indeed, most public employers have merit systems and very complex procedures emanating from the Tammany Hall era to ensure public employees are hired in a transparent manner. If the procedures could be circumvented through the mere act of entering into a contract for personal services, a bedrock protection for the public would be eviscerated.

This view is also supported by the sheer lack of legislative intent suggesting AB 5 applies to public agencies. As a general matter, courts will interpret legislation in accordance with legislative intent. That’s particularly true when the legislation has such a significant impact.

If a court were to conclude AB 5 does apply to public agencies under the Labor Code, it’s also unclear what that would mean because only a rather random smattering of its provisions applies to public agencies. They include:

• Rehabilitation services;
• Prohibited forms of payment;
• Use of identification numbers on pay stubs;
• Time off for volunteer firefighter, peace officer, and emergency rescue personnel;
• “Kin care” leave;
• Disclosure and consideration of arrest/detention not resulting in a conviction or expunged conviction
• Prohibition on recording in restrooms, locker rooms, or changing rooms
• Consumer credit reports for certain positions
• Lactation breaks
• Whistleblower retaliation protections;
• Cal/OSHA

On a practical level, most of the items seem unlikely to spur a challenge regarding the application of AB 5 to public agencies, in part because, aside from one-person operations, most contractors already comply with the provisions for their employees who serve government through contracts.

One major concern is workers’ compensation laws, which are under the Labor Code and do apply to public agencies. Again, this could become an issue if, and only if, a court determined AB 5’s own provisions, added to the Labor Code, apply to public agencies—despite the lack of any express language or legislative intention to do so

But even if a court were to reach that conclusion, the effect might be fairly limited for the same reason as above: Only individuals who contract with public agencies and assert they were misclassified as contractors would likely be affected. Anyone employed by a private company that contracts with a public agency is likely covered by workers’ comp already

Unemployment Insurance Code Ties Raise Important Issues

AB 5’s adoption of the ABC test for the entire Unemployment Insurance Code is somewhat more consequential: Unlike the Labor Code, the provisions of the Unemployment Insurance Code generally apply to public employers. So, in theory, an individual “contractor” terminated by a public agency and not employed by a private company could file an unemployment claim.

It’s unclear, however, how the California Employment Development Department would handle the situation. For example, many contracts expire by their own terms. Could persons whose contract ends and who assert they were appropriately classified as employees under the ABC test receive unemployment insurance?

The scenario points to a more fundamental problem with AB 5’s potential application to public agencies: Even if a court were to conclude the law applies to public agencies, how would the ABC test even work in the public sector?

The key difference between the ABC test and the old “common-law” control test is that, to be found to be an independent contractor under the ABC test, the individual must “perform[] work that is outside the usual course of the hiring entity’s business.” Of course, government isn’t in business at all, a point further suggesting AB 5 wasn’t intended to cover government. To the extent government can be said to be in business, it’s in the business of providing public services, mostly for free or highly subsidized. It’s not obvious that anyone is in the business of government.

A contrary conclusion also would prove to be too much: Virtually everyone with whom the government contracts would become an employee because the scope of its services is so broad. California has 4,444 local government agencies, not including school districts, community college districts, and joint powers authorities (or JPAs). Many function primarily by using contractors. If all of them were required to hire employees as opposed to contractors to manage their operations and perform public services, government costs would skyrocket, and services would be crippled.

Not the Last Legislation We’ll See

While the arguments against applying AB 5 to most public employment settings are compelling, the law is really a slow-motion disaster—not a “one and done.” During the current legislative session, innumerable bills will be introduced as a “cleanup” and to exempt various industries

For many years, unions have pressed the legislature to curtail public-sector contracting, which will undoubtedly lead someone to propose amendments expanding AB 5’s scope to the public sector. When the issue rears its ugly head, I hope public employers are prepared to show the staggering cost such an expansion would impose on taxpayers. But pigs rarely fly in that direction, do they?