Proposed California Legislation Seeks To Codify Dynamex Decision (With A Notable Exception For Licensed Real Estate Professionals)

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By: Dennette A. Mulvaney, Esq.

In the year or so since the California Supreme Court issued its unanimous decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles, 4 Cal. 5th 903 (2018), there has been considerable concern and confusion about the classification of workers as employees as opposed to independent contractors. Further complicating matters is the recent 9th Circuit Court of Appeals decision in Vazquez v. Jan-Pro Franchising International, Inc., which ruled that the three prong “ABC” test established in the Dynamex case should be applied retroactively.

The California Legislature, through Assembly Bill 5 (“AB-5”), is poised to pass legislation to amend the California Labor Code to codify the decision in the Dynamex case and clarify its application. Of particular import to a number of professions, the proposed legislation provides for exceptions to the application of the Dynamex decision, including licensed insurance agents, health care providers, investment advisors and real estate licensees.

In California, a licensed real estate broker and a real estate salesperson licensed under that broker may contract between themselves as independent contractors or as employer and employee. (Cal. Bus. & Prof. Code §10032.) This classification has been available under the California real estate licensing law for decades. The Dynamex decision, with its “ABC” test, is in conflict with California real estate license laws.

Dynamex and the “ABC” Test

The “ABC” test established by the Dynamex decision considers all workers to be employees unless the hiring party is able to demonstrate that all of the “ABC” factors are established:

  1. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work in and in fact. 
  1. That the worker performs work that is outside the usual course of the hiring entity’s business. 
  1. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Application of the “ABC” test to real estate licensed professionals would likely result in classification of licensed real estate salespersons as employees in an industry in which licensed professionals have long enjoyed the ability to elect an independent contractor relationship. Real estate brokers are required by the real estate licensing law to supervise salespersons associated with their license and the work that a real estate salesperson does is directly within the usual course of the broker’s business. Thus, a real estate licensed professional would likely fail the “ABC” test established by the Dynamex decision. Perhaps in anticipation of potential challenges to this business model, recent 2019 amendments to the California real estate licensing law specifically reiterate the validity of an independent contractor choice between broker and salesperson.

The Borello Decision

Prior to the Dynamex decision, the test for determining independent contractor status verses employee status in California was the one adopted in S.G. Borello & Sons. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. The Borello court considered the key principal question of whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Then, nine additional factors were considered in determining whether an individual was an independent contractor or an employee:

(1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) the method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating a relationship of employer-employee.

Borello, 48 Cal. 3d at 351.

Under the Borello decision, not all of the factors had to be met.

Assembly Bill 5

AB-5 would codify the decision in the Dynamex case and clarify its application. It provides for the application of the “ABC” test enumerated in the Dynamex case to determine the status of a worker as an employee or an independent contractor for all provisions of the Labor Code and the Unemployment Insurance Code, unless another definition of “employee” applies. AB-5 expands the “ABC” test of Dynamex beyond the wage and hour context in which it was decided to apply to additional employee labor protections and benefits. The Bill excludes certain occupations from application of the “ABC” test, and instead, provides, for those occupations only, that the test adopted by Borello would apply if certain conditions were met.

The proposed legislation would add section 2750.3 to the Labor Code to read:

2750.3. (a) For purposes of this code and the Unemployment Insurance Code, where another definition or specification for the term “employee” is not provided, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee unless the hiring entity demonstrates that all of the following conditions are satisfied:

(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.

A number of industry groups lobbied for exclusion from the Dynamex test, including the California Association of Realtors (“CAR”) on behalf of licensed real estate professionals. CAR did not support the original language of AB-5 addressing real estate licensees, as, in their view, it did not adequately express the law governing the relationship between real estate licensees. After amendment, CAR supports AB-5 as it provides real estate licensees an exemption from the Dynamex test and recognizes the numerous laws and regulations through which a licensed real estate brokerage operates.

The proposed exception for real estate licensees, as provided for in AB-5 provides:

(5) A real estate licensee licensed by the State of California pursuant to Division 4 (commencing with Section 10000) of the Business and Professions Code shall have their relationship governed by Business and Professions Code Section 10032(b). If that section is not applicable then classification shall be governed as follows: (1) for purposes of unemployment insurance by Unemployment Insurance Code Section 650; (2) for purposes of workers compensation by Section 3200 and following (3) for all other purposes in the Labor Code by the test adopted by the California supreme Court in the case of S.G. Borello and Sons, Inc. v. Department of Industrial Relations (1989) 48 CA.3d 341.  The statutorily imposed duties of a responsible broker under Business and Professions Code Section 10015.1 are not factors under the Borello test.

The real estate licensee exception in AB-5 refers to existing California code sections and makes it clear that existing law supports the independent contractor model for real estate licensed professionals.

The likely passage of AB-5 may have implications to states other than California. California has the largest state economy in the country, and as such, other states could follow California’s lead on this issue and enact similar laws. AB-5 recently passed the California Assembly and is now in the state Senate for consideration.

For questions on this article please feel free to contact Dennette A. Mulvaney of Leech Tishman Fuscaldo & Lampl at 626.796.4000.

Dennette A. Mulvaney is Counsel with Leech Tishman, and a member of the firm’s Bankruptcy & Creditors’ Rights and Real Estate Practice Groups. Dennette is based in the firm’s Pasadena, CA office and can be reached at 626.796.4000 x 391 or dmulvaney@leechtishman.com. Please feel free to contact Dennette with any questions you may have on this and other bankruptcy or real estate matters. For more information on Leech Tishman’s legal services, please visit www.leechtishman.com.

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