New California Law to Classify Employees and Independent Contractors

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On September 11, 2019, California lawmakers passed California Assembly Bill 5 (AB 5), codifying and clarifying the California Supreme Court’s landmark 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which fundamentally altered the test for determining the classification of workers as employees or independent contractors in California. We previously blogged about the Dynamex decision, under which workers are presumed to be employees for purposes of claims for wages and benefits arising under Industrial Welfare Commission wage orders, and companies must meet a three-pronged “ABC” test to overcome this presumption and establish that an individual is an independent contractor. AB 5 would codify the ABC test into law.

AB 5 has been sent to Governor Gavin Newsom, who recently endorsed it in an op-ed for the Sacramento Bee, and he is expected to sign it into law.

Under AB 5, a new Section 2750.3 would be added to the California Labor Code. Section 2750.3, subsection (a)(1), will state that, for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, 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:
(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.

Under the new law, California workers can generally only be considered independent contractors if the work they perform is outside the usual course of a company’s business. Conversely, a company must classify workers as employees if the company exerts control over how the workers perform their duties, or if their work is part of a company’s regular business.

AB 5 has far-reaching implications for California businesses who classify their workers as independent contractors because it extends the scope of the Dynamex ruling from only Industrial Wage Commission Orders to include claims for wages and benefits under the Labor Code and Unemployment Insurance Code. The Dynamex decision applied only to rules governing minimum wages, overtime and meal and rest breaks, but under AB 5, individuals classified as employees must also be afforded workers’ compensation in the event of an industrial injury, unemployment and disability insurance, paid sick days and family leave.

However, AB 5 is also narrower than the Dynamex decision in that it exempts certain occupations from the new test. The new Labor Code section would provide limited exemptions for certain occupations, including direct sales salespersons, licensed estheticians, licensed electrologists, licensed manicurists (until January 1, 2022), licensed barbers and licensed cosmetologists from the application Labor Code Section 2750.3 and the holding in Dynamex, provided that the individual:
• Sets their own rates, processes their own payments, and is paid directly by clients;
• Sets their own hours or work and has sole discretion to decide the number of clients and which clients for whom they will provide services;
• Has their own book of business and schedules their own appointments;
• Maintains their own business license for the services offered to clients; and
• If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.

If a company can meet its burden of showing that the individual meets the above criteria, then the determination of proper classification for that individual would be governed by S.G. Borello & Sons, Inc. v. Department of Industrial Relations, the 1989 decision that has been the prevailing law for wage order cases in California prior to Dynamex. Borello established an 11-factor inquiry into the degree of control a company exerts over the worker’s performance of his or her duties: whether the hiring entity has the right to control the manner and means of accomplishing the result desired; the right to discharge at will, without cause; whether the worker is engaged in a distinct occupation or business; the kind of occupation and the skill required in the particular occupation; who supplies the instrumentalities, tools and the place of work for the person doing the work; the length of time for which services are to be performed; the method of payment; whether or not the work is part of the hiring entity’s regular business; and whether or not the parties believe they are creating an employer-employee relationship.

Another aspect of AB 5 worth noting is that it would not allow an employer to reclassify an individual who was an employee on Janaury 1, 2019 to an independent contractor due to the measure’s enactment.

With the law set to become effective on January 1, 2020, companies, particularly in the salon and beauty industry, would be wise to reassess the classification of their workers to ensure compliance with the new law. The attorneys at Conkle, Kremer & Engel have extensive experience advising businesses on best practices regarding proper worker classification, and will be continually monitoring developments related to AB 5 as they occur.

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New Law Requires Professional Cosmetics Labels to List Ingredients

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Professional cosmetics sold in California must have full ingredient labeling in the same manner as consumer cosmetics, if the products are manufactured after July 1, 2020.  The California legislature unanimously approved AB 2775, introduced by Assembly Member Ash Kalra.  The bill was signed into law by Governor Brown on September 14, 2018 and enacted as new Section 110371 to the Health and Safety Code.

There are over 312,000 professional cosmetologists who are licensed to provide nail and hair services, most often in salons.  The legislature found that “[i]nformation on the ingredients in professional salon products is essential to ensuring that workers and owners can make safer product choices and take steps to protect themselves and their customers against harmful exposures.”

The new law will establish that professional cosmetics must have a label affixed on the container that satisfies all of the labeling requirements for any other cosmetic pursuant to the federal Food, Drug, and Cosmetic Act (21 U.S.C. Sec. 301, et seq.), and the federal Fair Packaging and Labeling Act (15 U.S.C. Sec. 1451, et seq.).  In other words, professional cosmetics must have the same ingredient labeling as consumer cosmetics.

The law already defines the term “cosmetic” as “any article, or its components, intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to, the human body, or any part of the human body, for cleansing, beautifying, promoting attractiveness, or altering the appearance.”  (Health and Safety Code Section 109900)  The newly-enacted law introduces a new definition of “professional cosmetic,” meaning a cosmetic “that is intended or marketed to be used only by a professional on account of a specific ingredient, increased concentration of an ingredient, or other quality that requires safe handling, or is otherwise used by a professional.”  In turn, “professional” is defined for this purpose as “a person that has been granted a license by the State Board of Barbering and Cosmetology to practice in the field of cosmetology, nail care, barbering, or esthetics.”

There is arguably some ambiguity in that the new statute could be read to define a “professional cosmetic” in a circular manner as including a cosmetic that “is … used by a professional.”  Such an ambiguity is not likely a concern in this particular Act.  This is because the effect of this new law is just to require the same type of ingredient labeling for both consumer and professional cosmetics, so it should not matter whether a licensed professional uses a resalable consumer or professional cosmetic for purposes of compliance with this law.  However, if in the future the same definition of “professional” is incorporated into other enactments (much like “the definition of cosmetics” was incorporated here from a different statute), the circular definition may become more problematic.

The new law was enacted with widespread industry support, including the Personal Care Products Council, the Professional Beauty Association, California Chamber of Commerce, and Unilever.  Many manufacturers have already listed product ingredients on their professional cosmetic lines in a manner consistent with that required for retail cosmetics, and so may already be in compliance.  But manufacturers should review their professional cosmetic product labeling well ahead of the July 1, 2020 effective date in order to determine whether they comply.  Further, manufacturers should be aware that there is no specific “professional cosmetic” exception to other warning label requirements, such as Proposition 65, which requires warnings if use of a product on a consumer in California would result in significant exposure to identified chemicals that are known to cause cancer, birth defects or other reproductive harm.

Manufacturers are well-advised to seek qualified counsel to review their circumstances before committing to potentially costly label changes, to be sure they comply with all legal requirements.  Conkle, Kremer & Engel attorneys stay up to date on important regulatory developments affecting their clients in the professional salon products industry, and are ready to help clients apply navigate the changing regulatory landscape in California and elsewhere.

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