California Assembly Bill 5 and the (Non-)Impact on the Financial Services Industry

California Assembly Bill 5 (the “Bill”) was passed in Senate on September 9, 2019 after passing the Assembly back in May. According to reporting by the New York Times, it is expected that California Governor, Gavin Newsom, will sign the bill.

The Bill changes the status quo on the classification of employees and independent contractors. As the preamble to the Bill makes clear, California courts currently follow the common law rules for determining whether an employer-employee relationship exists or whether a person is an independent contractor. That test has numerous parts, but one of the important elements for a person to be considered an independent contractor is that the person must be free to control the performance of their work.

However, the Bill provides a greater likelihood that a person would be classified as an employee instead of an independent contractor, which means that the employer would be required to make payments for “payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance”. Ultimately, the Bill would provide greater protections and benefits to persons previously classified as independent contractors and now classified as employees. It would cost employers more to employ these individuals and the employers would be subject to added liability.

Under the Bill, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation or business.”

Under this test, most independent contractors in the financial services industry in California would be classified as employees absent an exemption. Section (b)(4) of the Bill exempts both broker-dealers and investment advisers and their agents and representatives that are registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority from this new test. Instead, the Bill makes it clear that these employers and individuals will continue to be subject to the framework outlined in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

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